Blaming Free Checking is a Red Herring: A Rebuttal

Steve Topper, writer for ActonFS, writes in rebuttal to this blog post: How Durbin will Speed the Decline in Branch Banking.

I find it both astonishing and disappointing that so many people either in banking or writing about banking believe the free checking account is the source of today’s bank profitability problems.

I was reminded of this Tuesday after reading Brett King’s article, “Why Durbin will Kill the Branch,” forwarded to me by my blogging partner Joe Swatek.  Joe knows that nothing gets me on my soapbox quicker than an article denigrating free checking.

King begins his article mentioning checking account fees.  In the second paragraph he quickly establishes free checking as the villain.  King writes: “In the US, there are actually people you meet who will tell you that free checking is, or at least should be, a constitutional right.  Thus, emotions run high when a bank suggests that you now have to start paying for the right to keep YOUR money with their bank – it’s an outrageous concept to many!”

Paragraph three is spent blaming the banking industry for “training” consumers to demand free checking.

Paragraph four is devoted to explaining why free checking wasn’t really free – at least from the banks’ perspective.  While it may not have been free for the bank, it was, and remains, free for consumers.  As a long-time free checking customer my only out-of-pocket expenses have been buying checks and paying the infrequent foreign ATM withdrawal fee.  Still, as long as I don’t have to keep a minimum balance or pay a monthly fee, it’s FREE checking.

It wasn’t until the fourth paragraph where King finally gets to his point – the Durbin amendment and its negative impact on interchange fee income for the banks.  His final three paragraphs get at the heart of the profitability issue – to remain profitable, bankers in the U.S. need to follow the lead of Great Britain and close branches.  According to King, since 1990 the number of bank branches in the UK has dropped by half.

At one point King suggests that U.S. bankers are now just waking up to the fact that they need to consider changes to their outmoded business model based on large brick and mortar branch networks.

Having written several blogs about the uncertain future of branch banking, I agree with King’s perspective that it is an outmoded business model.

Where I part company with King is his attempt, like many others, to make free checking the bankers’ whipping boy.  It’s a red herring.

Eliminating free checking while introducing new checking account fees and increasing current fees won’t begin to solve consumer banking’s revenue and profitability problems.  To invoke one of my favorite analogies – it’s like throwing a deck chair off the Titanic.

It’s a disingenuous argument.

The decision to offer free checking is a classic marketing decision.  Many years ago, it was used successfully as a point of differentiation.  This was long before high ODP fees and debit card interchange fees.

 

Consumers loved it as they believed then, and continue to believe today, that they deserve free checking as they are lending their money to the bank interest-free month after month.  The fact that things have changed over the years from the banks’ cost and revenue perspective is irrelevant to these consumers.  As things have changed, banks have failed miserably in educating their customers about these changes and their impact on account pricing.

Further proof that free checking isn’t the villain it’s portrayed to be is evident in the new “stealth” free checking accounts being offered by the mega-banks and a few followers to replace free checking.  For example, the following three mega-banks all offer what I call a “stealth” free checking account which is a checking account that has a monthly service fee which can be easily avoided by simply agreeing to a monthly direct deposit as shown below:

• MyAccess Checking from BofA requires a monthly direct deposit of $250 or more.
• Chase Total Checking requires a monthly direct deposit of $500 or more.
• Wells Fargo Value Checking requires a monthly direct deposit of $250 or more.

Agreeing to a monthly direct deposit isn’t generating any additional revenue for these three banks.

In fact, years ago these banks would have been promoting these accounts as Free Checking with Direct Deposit.  They had to stop as a result of Regulation DD, Truth in Savings which sets forth strict rules for advertising a checking account as being free.

So the next time you read an article that identifies the ubiquitous free checking account as the root cause of banks’ revenue and profitability problems, you’ll know it’s a classic red herring.

Personally, I think it’s great that the mega-banks and many of the nation’s regional banks have dropped free checking.  This enables community banks and credit unions offering free checking to differentiate themselves from the big predatory banks with expensive branches in their market areas.