You may have noticed how it is getting harder and harder to find a bank or credit union that offers free checking. For many years, it was common practice for financial institutions to provide most costumers with checking accounts that were free of fees. However, new rules in the banking industry are being blamed for a dip in the percent of checking accounts that are considered free.
Free checking accounts typically have no monthly service charges and no minimum balances. But it costs money for a bank to maintain a checking account, as much as $250 to $300 per year. If your account is failing to generate that much revenue, then your bank could be losing money.
An annual study conducted by BankRate.com indicates an 11% drop in free checking accounts between 2009 and 2010. In 2009, 76% of accounts came without service charges or minimum balance requirements. In 2010, the number was down to 65%.
That represents a complete turnaround in the way things had been going. Since 2003, the percent of free checking accounts had been steadily rising but things changed when banks were forced to adjust to new reforms.
Two major changes concerning how the financial industry is regulated are the main reasons for the sudden change.
Optional Overdraft Protection
Arguably the biggest issue for the financial industry was the Federal Reserve's rule that banks must give customers the option of declining overdraft protection for everyday debit card transactions. This new rule affected only debit cards and not personal checks.
However, income collected from debit overdraft fees was quite substantial. It's estimated that financial institutions collected more than $37 billion in overdraft fees in 2009 - more than half came from debit and ATM transactions. The new rule allowing people to opt out of overdraft protection means their cards will simply be declined if they have insufficient funds. But it also means banks will lose a large portion of the fees they had been collecting.
The money collected from overdraft fees helps subsidize features like free checking accounts. Without that revenue, banks are forced to come up with a new way to make that money.
Traditionally, banks have made a profit by investing your money in other places. But with interest rates hitting rock bottom, the money you deposit in your accounts is less profitable.
Regulating Interchange Fees
Yet another source of revenue for financial institutions is interchange fees.
Banks and credit card companies like Visa and MasterCard charge businesses like gas stations, grocery stores, and other merchants a percentage of the purchase every time a customer uses their debit card. This does not happen if a customer chooses to write checks instead.
But a new provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act known as the Durbin Amendment could change all of that. Senator Dick Durbin of Illinois said he feels the move could help the U.S. economy.
"By requiring debit card fees to be reasonable, and by cleaning up Visa's and MasterCard's worst abuses, small businesses and their customers will be able to keep more of their own money. Making sure small businesses can grow and prosper is vital to putting our country back on solid economic footing," the Democrat said in a statement release in May 2010.
The provision gives the Federal Reserve the right to regulate interchange fees. But first, a study will be conducted to determine what it actually costs to process and clear debit transactions.
The amendment is mainly intended for major banks with more than $10 billion in assets, so smaller local banks and credit unions could continue charging the same for interchange fees.
There have been lawsuits filed challenging the constitutionality of the Durbin Amendment. However, banks are already bracing for the impact of the new reforms. That is precisely why the number of free checking accounts is dwindling and consumers are seeing higher fees and new fees from their banks.
What Can You Do?
At this point, you still have options when it comes to choosing where you bank. The fact is, the majority of checking accounts (65%) still come without monthly service charges and minimum balances.
If you notice your bank starting to charge fees that weren't on your monthly statement before, start by asking about other types of accounts that might be available. You could also be eligible for fee waivers if you meet certain requirements, such as setting up a direct deposit.
If you can't avoid service charges at your current bank, you should be able to find a different financial institution that offers a better deal. So why not take your money elsewhere?
Remember, you can avoid the extra money your bank charges you to reorder checks when you choose to order cheap checks online from Check Advantage. Our affordable prices can be as much as 75% less than at your bank.
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