Should You Be Mad That Free Checking Accounts Are Becoming a Thing of the Past?

by Odysseas Papadimitriou on September 9, 2011

free checkingWait, they charge fees for checking accounts? This has become a common refrain as more and more consumers around the country are all of a sudden finding monthly fees on their previously free checking accounts. Aside from initial bewilderment, people are responding with emotions that run the gamut all the way from anger to understanding. But, how should you really feel about added monthly fees on your bank account?

It’s understandable that you might at first be angry about having to shell out monthly payments for a service that used to free, but what if there was a good reason for the switch? That might change things for many of us and, of course, begs the question: Why are checking account fees gradually becoming as common as free checking once was?

There are, in fact, two reasons: new overdraft rules and the Durbin Amendment.

Overdraft Rules
In the past, when customers overdrew their checking accounts, most banks approved these transactions and then charged $25-35 in fees. Generally, this transaction approval and subsequent assessment of fees occurred without customer approval, meaning a customer who mistakenly believed he had plenty of money in the bank could have been charged $35 for buying a cup of coffee with a debit card if the charge took his balance into negative numbers.

In response to consumer complaints about this practice, the Federal Reserve enacted new rules in July 2010 that would require banks to give consumers the choice to opt-in for the ability to overdraw their accounts. If they did so, their bank would approve transactions resulting in a negative account balance and charge a fee. Those people who chose not to opt-in would see such transactions get declined.

While this might seem like a systemic improvement, overdraft fees were a considerable source of revenue in the banking world, accounting annually for between $25-38 billion. For many banks, the obvious answer to their new cash flow dilemma was to bring back monthly and annual fees for checking accounts.

So, how did consumers react to this development? In general, they could be broken down into three groups:

  1. Those who never overdrew their accounts: To them, the additional fee seemed unfair, as if they were suddenly paying for others’ mistakes.
  2. Those who often paid hefty overdraft fees: Clearly, anyone who felt that they’d been the victim of excessive overdraft fees was glad to have this service heavily regulated, even though it meant paying a different, more regular and more obvious set of checking account fees.
  3. Those who would rather pay a fee than have a check bounce or a transaction get declined: The new rules didn’t change much for this crowd, as life would basically return to normal after opting-in.

Durbin Amendment
The Durbin Amendment, as you may or may not know, is the part of the Dodd-Frank Wall Street Reform and Consumer Protection Act that gave the Federal Reserve the authority to regulate debit card interchange fees. As was the case with overdraft fees, debit card interchange fees represented a significant revenue stream for banks, and the 24 cent/transaction cap that the Fed finally decided upon would cost major banks $9.4 billion annually … if all else remained the same. However, major banks are compensating by cutting debit card rewards and experimenting with new fees for checking accounts.

Now, how do you think consumers feel about that? Most people aren’t big fans of change, especially when it comes to banking. So even if they’ll be able to get the same utility as a checking account from the new breed of prepaid cards, which can be free to use, the inconvenience is likely to cause some bitterness. But, again, is it justified?

Conclusion
Ultimately, while no one can tell you how to feel, anger about checking account fees would be better directed at the Durbin Amendment than overdraft regulations.

A checking account is a service provided by the bank, and as such, is something that customers should be responsible for financially. Over the years, however, because of things like overdraft fees, banks found themselves in a position where they could remove charges for checking accounts because they were making money elsewhere. In other words, overdraft fees subsidized free checking.

Changes to this system cannot really be a cause for anger then because the only people who would have reason to get angry about it (see above) were those getting a free ride from the high fees burdening others. These people should really be happy they got to benefit from their fellow consumers’ payments for as long as they did.

The Durbin Amendment, on the other hand, was designed to give a financial break to merchants, and the most cynical of us could, of course, argue that this is simply a manifestation of lobbying efforts. Besides, the Durbin Amendment is not likely to achieve its intended purpose, given that banks are again making adjustments in the face of revenue losses. So, instead of lower costs for merchants and potentially for consumers as well, we are seeing decreasing debit card rewards, increasing checking account fees and a gradual emphasis on spending vehicles like prepaid cards and credit cards, whose interchange fees have not been regulated.

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