For the past two years, we’ve all heard the mantra: free checking is dead. It was widely assumed in the industry that free checking could not survive – or at least flourish – in the wake of the damage to its economic model produced by recent overdraft and interchange fee regulation.
To paraphrase Mark Twain, those reports of the demise of free checking have proven to be highly exaggerated. Let’s consider the facts as of September 2011. Although two-thirds of the largest banks with the majority of checking accounts nationally have changed account terms and fees, making free checking no longer guaranteed, they still provide a free checking product linked to simple and achievable behaviors, such as making a direct deposit once a month. Even after these pricing changes, 71% of all consumers in September 2011 still had free checking, which suggests a product not only far from dead but not even mildly wounded. Furthermore, unconditional free checking remains intact at most financial institutions with under $10 billion in assets.
So, why do we still hear the free-checking-is-dead chant? A cynic might argue that the chorus complements the bank-bashing bandwagon. Perhaps, but I propose that the answer has two parts grounded in fact. First, the word “free” has specific regulatory limitations in the financial industry affecting the language rather than account reality. And second, it is not well understood that “free” is a very sound economic and business strategy, not a revenue giveaway. I believe that these answers explain why free checking is thriving, and will thrive as one of the most successful services in the industry for years to come. Further, understanding the sound economics of “free” is critical to financial institutions’ product strategy.
Let me share why “free” is a proven and profitable marketing strategy for many products, including checking accounts, under four classic approaches:
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