regulation dd - Free Checking Information

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.

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.

Continue Reading at Acton Marketing…

Blaming Free Checking is a Red Herring: A Rebuttal

Regulation DD and Free Checking