Ally Bank runs a magazine ad for its Interest Checking Account.
The nation’s largest banks are testing how much their customers are willing to pay for checking-account services that used to be free.
Bank of America Corp. and J.P. Morgan Chase & Co., the two biggest banks as measured by assets, have begun trying new fees in pilot tests from Hayward, Wis., to Newnan, Ga.
They include an account that charges a $3 monthly fee for debit cards. Another account designed for electronic-only banking charges customers a $12 monthly fee if customers go to a teller for assistance. In the test programs, some bare-bones checking accounts also now carry base fees ranging from $6 to $9 a month.
The new fees, which are limited to accounts for new and prospective customers in the pilot programs, can typically be waived if customers meet certain criteria.
The pilot testing is the latest indication of the push to boost fees as banks scramble to make up billions of dollars of revenue expected to be lost from new federal restrictions on debit cards.
The Federal Reserve in December proposed capping the amount banks can charge merchants for debit transactions at seven to 12 cents, from an average rate of 44 cents. The Fed’s proposal could reduce the revenue banks make from such fees, known as interchange, by 57% to $9.8 billion, according to CardHub.com.
Read more: The Wall Street Journal
It’s important to distinguish between online-only banks that offer a free checking account and being able to apply for a free checking account online.
This brief article will cover the internet-only banks offering free checking online.
At this time of publication, your author is aware of only six U.S. banks that qualify as online-only banks. They are:
- USAA Savings Bank
- E*Trade Bank
- Redneck Bank
- ING Direct
- Ally Bank
- Charles Schwab
A case can be made that ING Direct is no longer an online-only bank as it operates a few brick and mortar branches across the country. But for a majority of Americans, ING Direct remains basically an online-only bank.
What’s most unusual about this list of six banks is that only two of the six banks named their free checking account “Free Checking.”
Free Checking Online
Perhaps the most unusual online-only bank is the Redneck Bank located at www.redneckbank.com. It’s free checking account is named “flat out free™ checking.” If you’ve never visited this online bank’s website, you are in for a treat. It’s unlike any consumer bank you’ve ever encountered.
USAA Savings Bank named its free checking account Free Checking. Why not? It’s free of a minimum balance requirement and free of a monthly service fee. It’s honestly free checking.
The marketing folks at E*Trade Bank named its free checking account E*Trade Checking Account. It’s not a very original or descriptive name for a free checking account. Yet, this account has no minimum balance requirement and no monthly service fee. So it qualifies as free checking.
ING Direct named its free checking account Electric Orange Checking while the marketing folks at Ally Bank named their free checking account Interest Checking.
While Charles Schwab offers a free checking account, it isn’t called free checking. And, it is extremely difficult to locate it on the website. First, you won’t find it by going to the Schwab Bank website. You have to search the schwab.com investment site. And even on this site, it’s not easy to find. Once you do locate the appropriate landing page, you’ll find copy advising you that free checking at Schwab comes with a Schwab One Brokerage Account. Therefore, Charles Schwab isn’t the best choice if you are seeking a standalone free checking account.
Most online-only banks can offer free checking – even though they may not call their accounts free checking – because they don’t have expensive brick and mortar branch networks. Such branch networks are extremely costly and these costs are generally allocated to the banks’ checking accounts. Today, allocating branch costs to checking accounts seems like an irony given that the banks have been driving checking customers from the branches since the first ATM was installed at Chemical Bank in 1968.
If you are seeking a free checking account from an online-only bank, just make sure you do your research to verify that the checking account is free if you don’t find an account named free checking in the bank’s product menu. To ensure a checking account is free, you must make sure it is…
…free of a minimum monthly balance requirement and,
…free of a monthly service charge or fee.
Some banks claim to offer free checking if you agree to direct deposit. If you are able to arrange a direct deposit then for you, the account will be free checking. But, there are millions of Americans who do not qualify for a direct deposit from their employer or from the government (e.g. social security payments or similar payments).
If you are aware of any other online-only bank or credit union that offers free checking, be sure to send us an email with the information so we can add it to our list. You can contact us via the link at the top of the home page or any landing page.
Attention financial writers – many of the articles over the past year about the pending death of free checking are based on erroneous information.
One of our goals with this site dedicated to the free checking account is to provide the truth about free checking. As a financial writer we trust you’ll visit this site when writing any articles about free checking or when free checking is mentioned. Should you have an inquiry that cannot be answered by one of the many articles on this site, please contact us immediately and we’ll provide the information to the extent possible.
As for information we’ve encountered in recent free checking articles, here are some examples of information that is wrong or misleading:
- The free checking account is on its way out, it’s dead.
- The free checking account was created or started by a major bank in Minnesota.
- The free checking account is unprofitable.
- The mega-banks have been offering free checking for years.
- Free checking was started by the big banks.
- Free checking attracts only the lower income consumer who keeps a low balance.
- Banks can’t survive if they continue offering free checking.
- Banks have to drop free checking because of loss of overdraft fee income, a reduction in debit card interchange fees, and predicted high compliance costs as a result of the Dodd-Frank legislation.
None of the information above is even remotely correct and should not be used when writing articles and blogs about the free checking account.
Free Checking is Alive and Well
About the only banks dropping free checking are the four mega-banks – Wells Fargo, Bank of America, Chase, and Citibank. Unfortunately, because of their combined market share and nationwide coverage, their actions dominate the media. Occasionally, another smaller bank will follow along because of the lemming instinct – if the big banks are dropping free checking, it must be the right course of action.
What isn’t being reported in the media are the thousands of smaller community banks and credit unions still offering free checking. Most of institutions have no plans to drop free checking – especially now. They now have a stronger competitive advantage over the mega-banks operating in their market areas.
The Free Checking movement was launched in 1982 in Lincoln, Nebraska
Free checking as we know it today started in Lincoln, Nebraska in 1982, with the launch of the Totally Free Checking and Free Gift marketing program. It was not a bank or credit union that created this unique account or marketing program – it was a direct mail vendor that specialized in marketing campaigns for small banks. So, in effect, free checking had its origins at hundreds of small, community banks across America.
It wasn’t until the late 1990s that the four mega-banks and other large banks began offering free checking. And they did so strictly as a competitive or defensive move. They were among the last banks to offer free checking and first banks to drop it.
The Free Checking Account is Profitable
Free checking is profitable for the thousands of community banks and credit unions that continue offering it. There are two primary reasons for this:
- They don’t have the prohibitively expensive branch networks like the mega-banks with their thousands of branches spread across America. The reason free checking isn’t profitable for the big banks is that they allocate these massive branch costs to their checking accounts using the overhead allocation model. In reality, these mega-banks shouldn’t be allocating much, if any, branch costs to their checking accounts. Why? Since the first ATM was deployed in 1969 at Chemical Bank, the big banks have been employing a combination of new technology and punitive pricing (charging customers to use the branch to make a deposit) to keep checking customers out of the branches. The Internet has made visiting the branch obsolete for most checking customers. So, if checking customers are no longer using branches, why should their accounts absorb the overhead costs for them? These fixed costs should be allocated only to the accounts still requiring branches – like CD’s, safe deposit boxes, loans, and investment services.
- By using a different cost allocation model, smaller community banks and credit unions look at adding new checking accounts from a marginal cost perspective – not the “all in cost” perspective of the big banks. Since almost all community banks and credit unions have unused branch capacity and small branch networks, their fixed costs are basically static. So, the revenue from a new free checking account needs only be sufficient to cover variable costs. Any excess revenue can then be applied to the fixed cost base – thereby driving down the fixed cost of all accounts. On the other hand, like the mega-banks, these smaller banks and credit unions shouldn’t be allocating costs to checking accounts when so few checking customers use branches to transact business.
Free checking accounts have been profitable for the community banks and credit unions since they began offering this account in the early 1980s – long before today’s high overdraft fees and lucrative debit card interchange fees. So, it’s disingenuous for today’s mega-banks to claim that recent government meddling in the pricing of overdrafts and interchange fee amounts has made free checking all of a sudden unprofitable.
Remember, the mega-banks didn’t begin offering free checking until they realized the account was wildly popular – even among the wealthy – and wasn’t going away. But, with the recent federal legislation, these big banks saw an opportunity to launch a campaign about free checking profitability in the hopes of forcing the smaller banks to drop this competitive account.
“Free checking is unprofitable and will soon be dead,” is the perfect media story to achieve the mega-banks’ ultimate goal of killing the free checking account. If they can’t have it – they don’t want their competitors having it either. And the mass media had bought into this “big lie” hook, line, and sinker.
The Mega-Banks were the Last to Offer Free Checking
As stated above, the community banks across America were the first banks targeted for the Free Checking and Free Gift program introduced in Lincoln, Nebraska, in 1982. Free checking got a major boost by Washington Mutual (WaMu) when it began its massive expansion program in the Pacific Northwest during the 1990s and into the new century – ultimately expanding to other states around the country. WaMu’s primary marketing focus was on its free checking account. It basically owned the free checking market in the communities it served.
It wasn’t until the late 1990s that the mega-banks reluctantly added free checking to their checking product line. And then, they did very little marketing of the account. Perhaps the most aggressive free checking marketer was Bank of America with its online banner ads. Adding free checking was primarily a defensive move to protect themselves from the aggressive free checking marketing conducted by the community banks and credit unions in all markets where the mega-banks had branches.
We saw how quickly senior management at Chase Bank dropped WaMu’s free checking account shortly after acquiring the bank as a result of the near collapse of our economy. This was done after first promising these customers that Chase would retain free checking.
Blaming this move on recent government legislation is simply a classic example of employing a red herring.
The Truth About Free Checking Can Be Found Here
In the future, should you be writing a blog or media story about free checking, you should consider interviewing senior management and marketing people working for one of the many community banks and credit unions offering the free checking account. They can tell you the true story about free checking and why it is so important for their success.
In addition, you should definitely contact one or both of the financial services vendors specializing in free checking marketing programs. Both are headquartered in Lincoln, Nebraska. One is ACTON Marketing and the other is Haberfeld Associates. Both have been in the free checking business since the early 1980s. They are the true experts when it comes to free checking profitability.
ATTENTION CONSUMERS: Not all free checking accounts have the word “free” in them. Yes, I agree it doesn’t make sense for a bank or credit union to offer a free checking account yet call it something other than free checking.
But, this is exactly what the two hottest online banks have done.
The free checking account at Ally Bank is called Ally Bank Interest Checking. And it’s free. In fact, it’s better than free as you’ll discover below.
The free checking account at ING Direct goes by the name of Electric Orange Checking. And, it, too, is a free checking account.
What this means is that you’ll have to work a bit harder when searching for a new bank that offers you free checking.
If you’re one of the many consumers whose bank has betrayed you by eliminating your free checking account, you are probably fed up to the point where you want to find a new bank. You want to fire your old, mega-bank and take your business elsewhere.
Well, join the club.
But just remember, today you’ll have to look beyond the account name to determine if it is, in fact, a true free checking account.
Of course, like most things in life, there are some shortcuts to help you in your search. Here are 7 shortcuts you may find useful:
First, stay away from the four big mega-banks of Citibank, Chase, Bank of America, and Wells Fargo. They were late comers to the free checking world and are now the first to abandon this account. Contrary to what they might tell you, they put their interests ahead of your interests. Of course, most of you know this by now.
Second, immediately consider becoming a customer of a smaller community bank or credit union in your neighborhood. These guys were the first to offer free checking in the early 1980s and most still offer it today. They tend to put your interests before their interests.
Third, decide whether or not you prefer to bank with an online bank or need a local bank or credit union with brick and mortar branches. If you prefer an online bank, your selection process is extremely easy. If you qualify to bank with USAA, you can add this bank to the Ally Bank and ING Direct choices. A quick Google search of “online only banks” will turn up a few more candidates for your consideration.
Fourth, if you prefer a brick and mortar branch in your neighborhood or near where you work, make a list of local community banks and credit unions in these areas and go online and check their website listings for checking accounts. Most bank and credit union websites present their menu of checking accounts in a comparison chart format. Remember, their free account may not be called free checking.
Fifth, ask your friends, co-workers, and family members if they have free checking and if so, where do they have their account. And don’t forget to ask about the service they receive.
Sixth, if you are a member of the website Angie’s List or a similar site, checkout what others are saying about free checking and the banks and credit unions in your area. Check out Yelp to see what people are saying about a particular bank or credit union in your area.
Seventh, make a free checking inquiry on the website www.bankrate.com. This is a great “go to” site for information on banking products.
While searching for the best bank or credit union free checking account, you may encounter one or more accounts with names like the four shown below. Rest assured, with very minor exceptions, all are free checking accounts.
Totally free checking
Free interest checking
Totally free checking is a name that continues to be used by a number of community banks and credit unions. This was the original name for free checking when it was first introduced in 1982. Most banks and credit unions have shortened it to free checking.
Free interest checking is often the name used when a bank or credit union enhances its free checking account by paying interest on the balance in the account. Other banks use names like VIP Interest Checking and 50+ Checking on some of their free checking accounts.
Rewards checking accounts are almost always free checking. You earn a higher rate of interest on the balance in the account as the bank or credit union includes the balances in all of your deposit accounts in your rewards account. In addition, to earn interest monthly you must meet the activity criteria for your rewards checking account. Generally this requires using your debit card a certain number of times each month. You can see a list of the highest yielding rewards checking accounts at http://www.depositaccounts.com/checking/reward-checking-accounts.html.
In addition, there are other free checking accounts that fall into two categories we call:
Unnamed free checking
Stealth free checking
As mentioned above, online banks like Ally Bank and ING Direct offer free checking but don’t use the word “Free” in the account name. There are other banks and credit unions that do the same thing. This means you must verify whether or not the checking account has no monthly service fee or minimum balance requirement. Generally, this is easy to do when viewing the checking account comparison charts presented on most bank and credit union websites.
Our latest category of free checking accounts is called “Stealth free checking.”
Based on the federal government’s definition of free checking, these stealth free checking accounts cannot legally use the word “free” in their name.
Because these accounts, like eBanking and MyAccess from Bank of America and Chase Total Checking from Chase Bank have a monthly service charge and may have a minimum balance requirement attached to them.
Yet, you can AVOID having to meet the minimum balance requirement and AVOID the monthly service fee simply by using your account each month as required by the bank.
For example, while Chase Total Checking has a $12 monthly service fee, it is easily avoidable by simply establishing a monthly direct deposit of $500 or more. A less desirable option is to avoid the fee by maintaining a $1,500 minimum daily balance. Consumers seeking free checking should avoid Chase Total Checking unless they are easily able to meet the simple direct deposit requirement.
Still, legally, these stealth checking accounts do not meet the government’s requirement for being called or labeled free checking.
They are only free if you meet the monthly activity requirements.
On the other hand, there is no reason to choose a stealth free checking account offered by one of the four big mega-banks when you can get a truly free checking account with no strings attached at many community banks and credit unions in your neighborhood.
Just remember, the free checking account is alive and well and readily available at most of the community banks and credit unions in your neighborhood. With a little research effort, you should be able to find a free checking account to replace the one you had at your neighborhood mega-bank branch.