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Why Banks Are Suddenly Charging So Much for Checking

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We've grown accustomed to free checking accounts. The thought of paying anything for checking feels like highway robbery, even though research shows accounts cost banks up to $300 annually to maintain. Checking accounts have become like soft drinks and peanuts on an airline flight: Even if it's a service that costs businesses money, we expect to get it for free. Why? Because it's always been free. No other reason.

That's starting to change. Big banks from Bank of America (NYSE: BAC  ) to JPMorgan Chase (NYSE: JPM  ) to Citigroup (NYSE: C  ) have either raised, or are proposing to raise, fees on checking accounts. Basic checking? That'll cost you. Want a paper statement? That's extra. Talk to a teller? There's a fee. Bounce a check? Lose a firstborn.

The response has been predictable: Consumers are angry. And not just angry, but confused. Why are banks -- those bloodsuckers that took a shower in federal bailout money -- now nickel-and-diming the life out of us? Some thanks.

But the truth is banks have to begin charging more. They're justified to. A slew of new regulations are about to begin curbing the ways banks made money off checking accounts in the past.

Let's start there. The dirty secret is checking accounts were never free. Just because you never paid a set monthly fee doesn't mean they haven't found ways to mine money out of you.

One of the largest ways banks have made money off checking accounts has been interchange fees on debit card transactions. Consumers never see these fees, but here's how they work: Most checking accounts come with a debit card. When consumers use those debit cards, the merchant on the other end pays an interchange fee, which ranges from 1% to 3% of the transaction value. So when you buy $100 of groceries and pay for it with your debit card, the grocer may only get $97 or so; $2 goes to your bank in interchange fees, and a smaller amount goes to Visa (NYSE: V  ) or MasterCard (NYSE: MA  ) , which processes the transaction. The merchant makes up for these fees by charging consumers higher prices. There's nothing shady about this. Operating a card network costs money. Banks have to pay for it somehow.

But pending regulation is set to crimp banks' ability to charge interchange. In December, the Federal Reserve proposed limiting interchange fees to $0.07 to $0.12 per transaction, or about 80% below the current average. The new restrictions could take roughly $12 billion in revenue away from banks. They're going to replace that revenue. And they're going to do it by charging you monthly fees. Totally justified.

Who wins from these new regulations? Hard to say. The usual story is that lower interchange fees will save merchants money, and merchants will pass the savings along to customers via lower prices. This sounds neat, but it isn't backed up by much history because it's hard to verify empirically. Australia limited interchange fees in 2003, but there's no conclusive evidence showing consumer prices ever fell. Asked if she thought lower interchange fees would reduce consumer prices, Federal Deposit Insurance Corp. Chairwoman Sheila Bair said this week, "I'm not sure that's going to happen, and if it does happen, the benefit would be so tiny to most retail customers."

There is, however, evidence showing that regulating interchange fees leads to higher bank fees -- checking account fees, credit card fees, lending fees, etc. These fees hit consumers and businesses alike, potentially eliminating the savings of lower interchange. The uncomfortable reality is that banks have bargaining power. They'll collect money whether it comes from interchange fees or other service fees.

Overdraft fees are another major method banks use to get checking account holders to cough up money. Research shows the average household is charged $375 per year in nonsufficient-funds fees for overdrawing bank accounts. Banks know this. They count on it. So they can get away with avoiding set monthly fees simply by waiting for consumers to rack up billions in other "you've been naughty" fees on their accord.

But that, too, is changing. Since last summer, new regulation says consumers have to "opt in" to receive overdraft protection. If those who don't opt for protection overdraw their account, their transactions get declined and no overdraft fee is charged. Losing that group of overchargers means billions in lost fee revenue for banks. Bank of America's fee revenue from checking accounts fell 26% last year. Wells Fargo (NYSE: WFC  ) saw its service-fee revenue fall by $825 million. This is real money even for banks. They're going to make up for it. And they're going to do so by charging you set monthly fees. Again, totally justified.

One question that remains unanswered: How will consumers respond? Most consumers don't need old-fashioned banking anymore. Their employers offer direct deposit and they pay their bills online, not by paper check. Protesting new checking account fees, some consumers might flock to online-only banks that are still truly fee-free, like ING Direct and E*TRADE (Nasdaq: ETFC  ) . These banks usually don't offer physical branches, but who needs those anymore? Not many. And not me -- I recently dropped my bricks-and-mortar bank after it imposed monthly fees for an online-only bank that doesn't charge me a penny. A taste of things to come, I'd like to think.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns B of A preferred. Visa is a Motley Fool Inside Value recommendation. The Fool owns shares of Bank of America, JPMorgan Chase and Wells Fargo. Through a separate Rising Star portfolio, the Fool is also short Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (23) | Recommend This Article (18)

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  • Report this Comment On March 25, 2011, at 1:32 PM, lution wrote:

    And after enough customers leave because of the fees, the big banks will need to be bailed out again.

  • Report this Comment On March 27, 2011, at 9:10 AM, slard271 wrote:

    Why are banks entitled to ever-increasing revenue or some constant percentage of the fat of the land? Just because banks were gouging consumers, merchants et al in the past doesn't mean it was ever justified or that it should be perpetuated in another form. This is akin to all those whiny folks with no skills who were previously employed as mortgage brokers "making six figures." They're utterly confused as to why they can now only get jobs making a third of that - if they're lucky. Perhaps they never deserved it in the first place?

  • Report this Comment On March 27, 2011, at 10:36 AM, projectchris wrote:

    Nice article,

    Are you able to to transfer funds between accounts with ease? example- are you restricted on money transfers between different accounts? For my ACH transfers from my zecco account, I have to wait 6 months to redirect any original funds that I have transferred to another account.---They claim they are concerned about money laundering.

    Are you able to get your hands on cash through ATM with no fees? I imagine there are times you need cash.

  • Report this Comment On March 27, 2011, at 10:52 AM, cmfhousel wrote:

    <<"Are you able to get your hands on cash through ATM with no fees? I imagine there are times you need cash.">>

    Yes. Any ATM, doesn't matter what brand it is, free of charge. Etrade reimburses all fees.

  • Report this Comment On March 28, 2011, at 11:11 AM, mtf00l wrote:

    I'm in agreement with slard271. Why do you believe the banks are entitled to the same profits when their services are becoming less valuable?

    Additionally, once the online banks become premiere they'll figure out they can "grow" profits.

  • Report this Comment On March 28, 2011, at 11:14 AM, cmfhousel wrote:

    They're entitled to what they can charge.

  • Report this Comment On March 28, 2011, at 11:27 AM, mtf00l wrote:

    Ok, I'll bite.

    What's it called when an industry fixes prices so they all make money and remove choice?

    The choice today is TBTF or online only. Yes, this is only my prognostication that one day soon the same fees will apply to all "financial" institutions.

  • Report this Comment On March 28, 2011, at 11:36 AM, catoismymotor wrote:

    Or you could join the happy masses that use credit unions.

  • Report this Comment On March 28, 2011, at 1:56 PM, Ivan0310 wrote:

    Definitely closed my BoA credit card account recently because after years of pristine history, they decided to start charging me an annual fee.

    They have all of my money and even my mortgage; I wasn't about to let them start skimming off the top...

  • Report this Comment On March 28, 2011, at 3:07 PM, milfalcon wrote:

    "They're entitled to what they can charge"

    Yeah, and now they can charge less. It may be fully *understandable* why they want to replace those fees and keep their obscene bottom-line profits, but just because it's understandable doesn't make it justified.

    Doesn't matter to me. I went credit-union many years ago, and haven't regretted it once.

  • Report this Comment On March 28, 2011, at 11:58 PM, lewgoins wrote:

    Since I need a box to hold my weapons and coins when I deploy overseas, I'm tied to a brick and mortar bank. I had to shop around to compare minimum balances but I did find checking accounts without a monthly fee as long as you keep (lowest was $500) above a certain amount. Yes the interest rate is non-existant but all I do is maintain the minimum. I do all of my other banking through USAA.

    I've yet to come across a Credit Union that offers a box...maybe that's a growth area for them?

  • Report this Comment On March 29, 2011, at 12:22 PM, rhutmacher wrote:

    Credit unions ftw. Some credit unions actually pay you to have your checking there through fee free interest bearing checking accounts. Lower interchange income will definately put a damper on those rates though. Small financial institutions will be hurt most by this bill.

  • Report this Comment On March 30, 2011, at 5:48 PM, chadhenage13 wrote:

    Just to clarify a few things, I work for a bank, I've been there for 10 years. The comment that checking accounts were "always free" is simply wrong. Just in the last 5-10 years has the free Checking account become something that everyone offers. When I started with the bank 10 years ago the starter account required either 1. a direct deposit or 2. an $800 minimum balance. What did most people do? They set up their direct deposit into their checking and they didn't get a fee. Most banks are being forced back to that model due to new regulations. So let's not assume that you will get charged a fee, ask your banker find out how to avoid these fees. A true banker doesn't want to lose even a single client, we take it personally when a client decides to go elsewhere.

    What does today's banker bring to the table that a non-brick and mortar banker can't do? How about loan structure advice, investment advice, budgeting assistance, help with problems like fraud, identity theft, insurance, estate planning, etc. The truth is most traditional banks make the majority of their money the way banks always have. We lend money out at a higher rate then we pay on accounts. With today's rate environment if you are wondering why you only get say 1% on a 12 month CD I would consider asking your neighbor who just got a Home Equity Line at 3.75%. Oh and don't forget to throw in the fact that at a good bank the default rate on that Home Equity Line is about 0.60% which means the bank really makes more like 3.15% - the 1% on the CD so a net of 2.15%. Let's get down to brass tacks to pay a teller even $30,000 a year the bank has to do a lot of these deals like about $1.5 million worth for that one teller.

    Also let's keep in mind while the average household pays "$375 a year in overdraft fees" that only about 5% of bank clients pay overdraft fees period. This means 95% of bank clients are not getting overdrawn at all. In addition the article acknowledges that it costs banks about $300 to maintain an account. In this rate environment to make $300 a year the average bank needs that client to keep about $7,500 in their Checking account to make enough to offset this $300 annual cost (assumes a 4% net margin). How much do you keep in your checking? I know I don't keep $7,500 in mine.

    The comment about an industry fixing prices and removing choice is just ignorant. In just my town alone there are at least 12-15 different financial institutions that anyone can choose from. This doesn't touch the online banks and brokerage companies offering checking services. I don't know how anyone can seriously believe that they don't have a choice in banking.

    One last thing, (in reguards to banking regulations) if someone came to you told you that next year a law would be passed that would decrease your salary from $40,000 to $35,000 a year, would you be upset and try to find a way to make that $40,000 a year you were used to? You bet you would, this is basically what banks are doing. Remember the bank has to make enough to pay the salaries of the branch managers, customer service officers and tellers. Behind these nameless, faceless banks are employees who are just like you who only pay their bills by collecting a paycheck. Most of the people who are working for a bank day in and day out don't see things that you hear about on the news like stock options, private jets, company cars, etc. Those benefits are normally tied to the top 1%. Let's make sure that we have our facts straight. Making broad generalizations is always dangerous and assuming that all banks are the same is equally so.

  • Report this Comment On March 30, 2011, at 6:37 PM, milfalcon wrote:

    Salaries does not equal profits. Last year Chase made 17 billion in profit by itself (I don't know how much the big boys made as a group, but I'm sure that can be found out). The industry-wide losses from capping debit fees are estimated at 12 billion in this article, which means Chase will only lose a fraction of that. Even if half the 12 billion loss goes to Chase (which would be absurdly high), that still means they can make 11 billion profit, above and beyond paying all those salaries you mention. Capping the fees isn't reducing anyone's pay.

    Like I said, it's UNDERSTANDABLE they want to keep that massive profit (and even, from a shareholder's point of view, desirable), but that doesn't mean it's *justified* (which is the word I was objecting to). And I'm cynically certain that capping the fees will cause the banks to claim they just HAD to lay people off and cut back raises and other nonsense, because the nasty gov't took their money away. But it's BS. This won't cause them to start losing money in the slightest, and doesn't have to reduce anyone's pay (though it probably will as Dimon and company desperately seek other ways to keep profits at ludicrous levels so they can justify their ridiculous bonuses).

    And while it's beyond the scope of a comments section, if you believe as I do that the financial system has become an oversized parasite that drags down the rest of the economy by siphoning off talent and investment that would be better utilized elsewhere (hardly an original argument, Google turns up a million articles stating the case better than I can here), not to mention the insanity of having businesses that are too big to fail, then cutting the industry's profits is an excellent thing to do.

  • Report this Comment On March 30, 2011, at 10:32 PM, drago007 wrote:

    I could not have said it better myself, <milfalcon>. As a plant manager I'm forced to limit OT and salary increases of the workers so that the top 1% (which does not include me unfortunately) can have money in their expense accounts for lavish dinners, personal expenses and bonuses while the company's profits have been the best in the last 15 years. They use the scare of the recession to justify pay freezes.

    This fee thing is definitely going to backfire on banks. From personal experience, about 25% of people i know are dropping their bank accounts for cash/credit unions/online banks. And when customers go from a bank they don't only take their checking, they transfer everything, Savings, MM, and everything else because it's easier when everything is in one place, especially if you don't pay any fees.

  • Report this Comment On March 30, 2011, at 10:38 PM, truman1987 wrote:

    Our local banks donate a great deal of money to local charities. Internet banks contribute nothing to local charities. This is a big deal to me. I keep my money local and my checking is still free.

  • Report this Comment On March 31, 2011, at 1:46 AM, polenium wrote:

    Major banks are still far from solvent. Even after a huge bailout and stealing homes from thousands of families.

    No one really knows how bad their situation is because their books are unintelligible.

    They still have a lot of non performing mortgages listed at pre crash prices on their books and now they are trying to figure out how to make that go away. Putting the squeeze on checking acct. customers is only the beginning.

    I moved to local credit union and I don't pay a dime for checking and I get interest on my money.

  • Report this Comment On March 31, 2011, at 11:08 AM, BlueDevil05 wrote:

    I've stepped away from TMF for the past few years and must say that I'm shocked at the financial ignorance displayed by some of these comments. It's clear that only 1 person besides Morgan (MHenage), understands how Banks actually operate.

    Let me reiterate: Checking/Savings accounts are at best, break-even product classes. Banks make money by lending it out and use Account-based services to deepen the relationship with a customer.

    Any government interference that limits recoupment of the costs of a product will spur ANY business to find another avenue of revenue to cover their costs and Banks should not be vilified for following this course of action. Throughout history, increased government regulation has had a negative effect on the economy as a whole, which is being proven again by the anemic recovery to the most recent recession. We live in a free-market economy (for now) and the market, through consumers "voting with their wallets", should dictate the prices charged by businesses.

    It's obvious there is still a lot of anger among consumers; anger that is clouding judgment. Suffice to say there is a lot of blame for the most recent recession that can be directed at consumers, banks, lenders and the Government. However, to turn "profit" into a dirty word is ridiculous and I would expect better of readers of TMF.

  • Report this Comment On March 31, 2011, at 2:42 PM, derekrlee wrote:


    You seem to be missing the point. Even 5th graders know that the banks make the majority of their revenue from the spread. However, what they probably didn't know was that these institutions in which we place the highest level of trust in, have been actively engaging in risky investments with the deposits that they are supposed to be "safeguarding". (See: CDO's)

    This greedy carelessness - combined with the mantra of privitizing the gains and socializing the losses (See: 2008 financial meltdown) is why the majority of the public feels like they are being nickel-and-dimed with this latest round of fee increases.

    While I personally am as big of an advocate for a free-market economy as anyone, I am certainly not naive enough to believe that our current institutions can be trusted to operate ethically without strict regulation.

  • Report this Comment On March 31, 2011, at 3:02 PM, dave665 wrote:

    My understanding is that banks currently get paid 3% (via the Fed Reserve) on cash that they hold including customer deposits, or approximately 3% on bond investments etc. They pay you essentially 0% interest. So, for every $1000 you have in your checking account, on average, the bank makes about $30/yr. This means that they get paid by default, just for holding your money.

  • Report this Comment On March 31, 2011, at 8:01 PM, exeter17 wrote:

    MHenage what bank do you work for?

  • Report this Comment On March 31, 2011, at 10:14 PM, kalho13 wrote:

    I do not understand why anyone would chose a bank when many of the credit unions available offer most of the services provided by and bank and very low fees comparably. Can anyone (who doesn't work for a bank) present an argument for choosing a bank over a credit union?

  • Report this Comment On April 01, 2011, at 4:24 PM, Canuck2010 wrote:

    I've chosen a bank over a credit union or a trust company. Now I'm in Canada which has a slightly different banking system from the US, but I think many of the points still apply. It started a long time ago when the trust company I was banking with couldn't process a student loan application. It had to go through a bank, so I switched my business. Later on, I was touring on a Christian youth ministry team across Canada and we received sponsorship cheques once a month. Because I was with one of the big five banks, I could find a branch where I could deposit my cheque almost anywhere in the country. A couple of my teammates who used credit unions had to send their cheques home to their parents to have them deposited. Now I'm regularly trading stocks with my banks brokerage arm and I can transfer money between chequing, brokerage and my secured line of credit instantly with a couple of clicks and without paying wire fees or paying a courier to convey a cheque and waiting for it to clear.

    That is why I still choose a bank.

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