Free checking is labeled “free” for one simple reason – the word “free” is the single most powerful word used in marketing.
Consumers love acquiring something of value that’s free.
The free checking account as we know it today was first introduced in 1982. At the time, it was launched as Totally Free Checking and later shortened to Free Checking by many of the banks and credit unions offering the account.
At the time, there were no regulations covering the use of the word “free” to describe a checking account.
Over the next eight years, more and more banks and some credit unions jumped on the free checking bandwagon. Along the way, some banks began promoting their accounts as “free” even though the consumers had to keep a minimum balance. Others required direct deposit. These perceived abuses prompted the federal government to include the free checking account in its Regulation DD Truth in Savings Act enacted in December, 1991.
The new regulations went into effect on June 21, 1993.
The new rules governing free checking appear in Section 230.8 labeled “Advertising.”
It reads: “An advertisement shall not refer to or describe an account as ‘free’ or ‘no cost’ (or contain a similar term) if any maintenance or activity fee may be imposed in the account. For purposes of determining whether a checking account can be advertised as ‘free’ or ‘no cost,’ maintenance and activity fees include:
- “Any fee imposed if a minimum balance requirement is not met, or if the member exceeds a specified number of transactions.
- “Transaction and service fees that members reasonably expect to be imposed on an account on a regular basis.
- “A flat fee, such as a monthly service fee.
- “Fees imposed to deposit, withdrawal, or transfer funds, including per-check or per-transaction charges (for example, $.25 for each withdrawal, whether by checking or in person).”
It then goes on to list other fees that are not considered maintenance or activity fees like check printing fees and balance inquiry fees.
Oddly, the new regulation failed to definitively cover whether or not requiring direct deposit eliminates the ability to label an account as free.
Still, the new Truth in Savings law made it crystal clear that for an account to be called “free” it must be free of both a monthly service fee and a minimum balance requirement.
But a lot has happened since the rules went into effect 17 years ago. An avalanche of new technology has dramatically changed the way people do their banking while the economy has taken consumers on a violent rollercoaster ride – which is still moving in unpredictable ups and downs.
In the last 11 years we’ve experienced both the expansion and bursting of the tech stock bubble and, more recently, the housing bubble. We barely escaped a world-wide economic crash while our economic future is still very uncertain.
With record high unemployment, jobs continuing to move overseas, housing prices dropping like a rock, consumers experiencing both deflation and inflation at the same time, record low interest being paid on savings, health care and education costs soaring, and many workers being under-employed, more than ever consumers both need and desire free checking.
A free checking account has much more value to many consumers today than it did when it was first aggressively marketed throughout the 1980s and most of the 1990s.
Now is definitely the wrong time to eliminate one of the most valued bank accounts ever offered. And based on the new stealth free checking accounts from BofA and Chase, senior management at both banks seem to agree.
What we are witnessing today in consumers’ purchase decision making is a new frugality which has ushered in a rush to value.
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