Free Checking Doesn’t Always Mean More Customers Will Sign Up

A recently published article by a member of the Federal Reserve Bank of Kansas City noted that there was an overall increase in the access to free checking accounts following the 2011 debit interchange fee regulation. Despite the increased availability of free checking, however, it doesn't translate to more use of free checking by U.S. consumers.

The relatively new debit interchange rule capped fees collected by U.S. financial institutions with at least $10 billion in assets, which led to a slew of changes that bombarded consumer checking accounts at major U.S. banks. The changes included increased monthly fees, loss of debit card rewards programs and higher service fees.

Since the rule excluded smaller banks, these banks had a competition edge — free checking being the major attraction when regulated banks had to restructure their accounts and fees to recoup nearly $8 billion in lost revenue.

"Regulated banks were more likely to raise checking account fees, but exempt banks were more likely to reduce or eliminate fees," wrote Richard J. Sullivan, author of the piece published by the Federal Reserve Bank of Kansas City. "Thus, consumers' net increase in access to free checking stemmed mainly from the greater availability of free checking at exempt bank."

Hard to say 'no' to big banks
While the rise in free checking accounts at smaller banks means expanded access to a no-cost transaction account, it doesn't mean that consumers are more likely to sign up for one. The reason is due to some of the competitive advantages held by big banks.

As of June 30, 2013, the top 10 U.S. retail banks (out of 5,980 U.S. banks) held 44 percent of total deposits, according to FDIC data.

From marketing to branch presence to financial services, megabanks are better equipped to cater to the constantly evolving behaviors of consumers.

Major banks are still preferred with widespread access to in-person service, large ATM networks and the ability to tend to one's entire financial needs (i.e., deposits, loans and investments). Although free checking is very tempting, convenience often wins in the end.

In the New York City metropolitan area, I have access to numerous local small banks that provide absolutely free checking, but I stick with Chase Bank for its convenience. If it serves all of my needs and I'm able to avoid the conditional monthly fee on my Chase checking, why would I go anywhere else?

For most major banks that have revamped their checking accounts, many have claimed that the implementation of monthly fees do not affect most of its customers, who are already fulfilling the requirements to avoid those fees.

In June, PNC announced that it was discontinuing its free checking account and replacing it with a new basic checking account that carried a $7 monthly fee, which can be avoided. "For current customers, the impact will be minimal," said a PNC spokesperson. "Nine out of 10 are banking this way already with balances that exceed the minimums."

Banking technology also carries an allure that attracts the increasingly tech-adept consumer population.

For instance, mobile check deposits have been the craze due to the massive adoption of smartphones. Today, the techie feature is available through mobile applications from the top 10 U.S. banks. It is far less common at smaller banks. Many consumers demand mobile check deposits enough that they'll switch banks for it.

Even if it's easy for find free checking from smaller banks, it's hard to say "no" to the perks of going with a big bank.

"Free" may captivate certain cost-conscious consumers, but many will realize that "value" far outweighs a no-cost service. What good is something free if it doesn't provide value?

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  • Report this Comment On January 08, 2014, at 10:02 AM, SKD wrote:

    In order to make his point, Mr. Zhen fails to mention much of what the Kansas City Federal Reserve report demonstrates.

    The report actually went well beyond counting the number of banks offering free checking post-reform. It also looked at the dollars in checking accounts both before and after the reform went into effect. It found that “the footprint of all commercial banks that offered consumers free checking accounts increased from an estimated $184 billion in 2011 to $278 billion in 2012.” Moreover, the share of checking account balances in banks that offer free checking rose from 19.4 percent to 21.6 percent.

    The results were even stronger when the KC Fed controlled for the growth in business checking accounts. With that change, “the share held by banks offering free checking rose from 19.4 percent in 2011 to 25.3 percent in 2012.”

    Mr. Zhen also ignores the report’s finding that the big banks, which are regulated under debit reform, actually increased their offerings of conditional free checking accounts post-reform. The report concluded that with respect to conditional free checking accounts, “the overall picture on monthly fees suggests lower costs to consumers.”

    The bottom line is that the KC Fed report was quite thorough and, contrary to Mr. Zhen’s assertions, considered the advantages big banks have in reviewing the results relating to free checking. Mr. Zhen’s criticism here is not only simplistic; it's simply inaccurate.

    -Doug Kantor, Counsel, Merchants Payments Coalition

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