Free Checking On the Way Out: Who Should Pay?

July 1 and August 15 are the dates consumers need to worry about. New Fed rules for bank accounts go into effect on July 1 for anyone who opens a new bank account, while current account holders should know about changes to their accounts starting August 15.

On these dates, the Federal Reserve is limiting the ability for banks to collect fees from their customers through overdraft fees, a popular income source for banks and an unpopular nuisance for account holders. In the old system, the cost of offering free products was subsidized by the small percentage of customers paying overdraft fees.

Will I do believe it is good that overdraft fees, a penalty that targets whether by design or by practice the least wealthy customers, are placed behind an opt-in barrier, it leaves the banks with two strategies, both which will likely adversely effect customers who otherwise are good citizens and can skate by without paying fees.

First, the banks will enhance their marketing approach in order to convince customers that they want overdraft protection. For new account holders this is easy. A financial associate (salesperson) at a bank can ask the new account holder in person, selling the benefits of overdraft protection while downplaying the fee. For those who apply for an account online, the bank can bury the fee in an unrelated location on the website, separating the fee from the action in the applicant’s mind.

For current customers, banks can give their overdraft protection a fancy name like TD Debit Card Advance and send marketing materials through mail, email, phone, and text message, encouraging the account holders to allow the $35 fee.

Second, services for which we have grown used to accessing for free will no longer be so. I’ve managed to pay almost no banking fees for the last decade. Almost every fee I did pay in a savings or checking account was reversed. That has become more difficult in the past few years. Some of the accounts I prefer, particularly those with brick and mortar institutions like Wachovia, require minimum balances across all my accounts held there.

I expect that towards the end of the summer, banks will begin discontinuing many of their free products. Free checking will certainly be among the first of the most popular services to gradually disappear. The most popular programs across many banks, free checking for students and free checking for seniors, may be the last to go as we see free services for average, middle-class customers decrease.

Senator Chuck Schumer has already urged the Federal Reserve to ensure banks don’t penalize customers as they seek additional revenue when the cash cow of overdraft fees disappears. It’s unlikely the Fed will stop banks from adding new fees, some we may not have considered in the past. The banking industry will take a page from the airline industry’s handbook, in which every additional service has a cost to the consumer above and beyond the fare.

Like we are charged for meals on flights, banks may charge us for a monthly paper statement. Like we are charged for baggage, banks may charge us for viewing images of cleared checks. Like we are charged for changing our flight itinerary, banks may charge us for visiting a teller in person. Airlines charge us for cashing in our miles for “free” rewards, and banks may charge us for automatic bill payment services.

Perhaps banks are justified in charging account fees rather than offering free accounts. Shouldn’t a customer pay for his own service rather than expect another customer (such as one who pays overdraft fees) to subsidize the cost of operating that account?