Once again, a financial writer for a local newspaper fails to do his research on the future of free checking before writing his article.  As you’ll see in the article below, which appears in the March 18, 2011 edition of the Sacramento Business Journal, the writer’s opening statement reads:  “Once taken for granted by consumers, free checking is going away as banks try to replace income from fees they can no longer charge.”  Yet, as you read the entire article, you realize free checking isn’t going away.  The smaller community banks and credit unions are continuing to offer free checking to new and existing customers.  In fact, in the newspaper’s home town of Sacramento, the state’s largest credit union has a major newspaper and billboard campaign promoting free checking.  And, had the writer done his research, he would have discovered that the nation’s sixth largest bank, Pittsburgh-based PNC Bank, is keeping its free checking account as 75% of its checking customers have free checking.  For some odd reason, a number of today’s financial writers jump into stories about the pending demise of free checking before extensively researching the subject matter in order to get the story correct.  The real story is that the four mega-banks are adding fees and minimum balance requirements to their checking accounts with the end result being millions of checking customers fleeing to get free checking at the nation’s thousands of community banks and credit unions.  The real story isn’t that free checking is going away.  The real story is that the major banks are driving millions of checking customers away and into the lobbies of the nation’s community banks and credit unions.

Sacramento Business Journal article
Free Checking is Going Away
March 18, 2011 edition

Banks see checking accounts as new revenue source

Bigger institutions say regulations are forcing them to end free service

Mark Anderson/Staff Writer

Once taken for granted by consumers, free checking is going away as banks try to replace income from fees they can no longer charge.

National banks and community banks alike are adding – or at least considering – monthly fees on checking accounts as a way to increase revenue or encourage consumers to use inexpensive services like ATMs and electronic statements.

For years, banks attracted consumers with free checking accounts.  For a bank, the checking account is the account “that defines your relationship as the primary institution with the customer,” said Henry Wirz, chief executive of SAFE Credit Union.

The checking account had nothing to do with the near-collapse of the financial system, but the broad changes to financial regulations are changing the entire landscape of the banking industry.

“Who would have thought a few years ago that complicated derivative trading on Wall Street would eventually trickle down to the checking account?  But that’s pretty much what happened,” Wirz said.

The Federal Reserve last year created new rules that curbed checking overdraft fees, cutting an estimated $6 billion in fee revenue for banks and credit unions, according to Moebs Services, a Lake Bluff, Ill., financial services research company.

The income banks make from debit card interchange fees, paid by merchants, is also in question.  The Durbin Amendment, signed into law in July 2010, gave the Federal Reserve power to regulate interchange fees.  The law is set to be implemented this summer, which could cost banks billions more.

Some banks have raised their fees in anticipation of the interchange caps of the Durbin Amendment, but that language is still being modified.

With all that income potentially going away, banks are looking at new fees – and one of the easiest places to look is the checking account.

“The checking account creates a relationship between the bank and the account holder that often leads to other accounts, from credit cards and car loans to business products and mortgages.  It is tethered to debit cards, electronic banking, mobile banking and automated bill payment.

Bank of America is testing new checking accounts in Arizona, Massachusetts and Georgia.  The program will go nationwide at the end of this year or early next year.

The new accounts – and revised requirements for free checking – are at this time envisioned for new accounts only, said Don Vecchiarello, a BofA spokesman.  The bank has not really had free checking in the past, he said.  Historically, there was always some kind of requirement for account holders – usually a direct deposit arrangement or a minimum balance.

Bank of America’s proposed new basic checking account, called Essentials, will cost $6 to $9 per month, depending on the state.  It comes with a mailed statement, access to online banking and a debit card.

Free checking will be available only through an eBanking account, which requires an electronic statement rather than a mailed one, and the customer must make deposits either at the ATM or remotely.

“We’ve been doing some research with customers over the last 18 months as a result of the economy and regulatory issues,” Vecchiarello said.  “We wanted to see how consumers are conducting their banking.”

What the bank found is that customers want more clarity from their financial services providers, he said.  They also want to be rewarded and acknowledged for doing business with the bank.

In short, Vecchiarello said, rather than a single one-size-fits-all account, the bank now offers four different accounts to appeal to diverse needs of customers.

CLINGING TO LIFE

Wells Fargo stopped offering free checking to new customers in California in July.  The most basic “value checking” account comes with a $5 service fee, which can be waived with a minimum daily balance, or direct deposits into the account, said Julie Campbell, spokeswomen with Wells.

“Free is dying,” said Dan Bailey, executive vice president of retail banking at Tri Counties Bank.

But not all accounts will cost consumers, he said.

“The majority of people are OK with potentially paying a fee just for a standalone checking account as long as there are reasonable options available to avoid paying fees,” he said.

The bank has done extensive surveys of its customers and found that “people want products and they want services, and they want to know the rules of the accounts up front and clearly,” Bailey said.

The bank will likely stop offering free checking at some point but will offer ways for the customer to avoid fees, such as arranging direct deposit or meeting a minimum balance.  As a result, “the vast majority of our customers will not pay a fee,” he said.

River City Bank eliminated its basic free checking account this month to new customers.  About half the bank’s customers currently have free checking accounts, and those accounts will remain free, said Chris Nelson, River City’s executive vice president of retail banking.

The bank’s basic checking account now costs $15 per month, unless the account has a balance of at least $5,000.  But that account also comes bundled with a free safe deposit box, free cashier’s checks and free money orders.  The account also waives fees – up to a total of $15 per month – when customers use ATM machines not owned by River City.

The account comes with a lot of services and products that appeal to River City customers, who tend to be wealthier than average, he said.  “We’re not really going after the mass-market customer.”

LAND OF THE FREE

Not all banks are jumping on the fee bandwagon.  El Dorado Savings Bank, for example, is waiting to see what happens as other banks start charging, said Tom Meuser, the Placerville-based bank’s chief executive.

“The consumer is pretty angry right now with the economy and the high costs of everything,” Meuser said.  “If they start to get hit with bank fees, that’s a reason to leave the bank.”

El Dorado continues to offer its value checking, which requires no minimum balance, has no direct-deposit requirement and has no fees.

“The thing I think a lot of bankers have forgotten is that checking accounts can be very profitable by themselves,” once interest rates rise out of the basement, Meuser said.  More importantly, he added, “The money stays there.  It is a good source of funds.”

The addition of fees by banks could be a windfall for credit unions, which tend to offer value to their members.

“We have free checking now, and has been free, and it will be free in the future,” said Donna Bland, chief executive officer of The Golden 1 Credit Union.  “It is what it is, and it is free.  No asterisks, no fees.”

The credit union has steadily increased new checking accounts, Bland said, citing the consolidations in banking over the past several years and now the new fee structures being assessed by the banks.

“I think a lot of people are finally getting fed up and moving,” she said.

SAFE doesn’t charge for checking now, and it doesn’t plan to.  But that depends on regulations.

“We plan to hold out as long as possible,” Wirz said.  “But if a big part of your fee income goes away, it may be something we have to look at.”

SAFE is currently trying to get more of its customers to take electronic statements, because that represents a significant savings over paper statements.

“If you are unhappy with your bank, call them and let them know.  If they don’t help you, move your account,” said Gail Hillebrand, senior attorney with Consumers Union in San Francisco.

“The way to avoid fees is to be very careful.  You have to watch your account.  You have to look at what is happening on your statements,” she said.

For all the bluster being pushed by banks toward adding fees, banks do seem to be cautious in rolling out those fees, Hillebrand said.  “We are seeing trail balloons by the banks.  They are trying to see what the consumer will stand for.”