Why free checking accounts are disappearing

Free checking may not continue to exist for long. (Photo Credit: CC BY/Betsssssy/Flickr)

A free checking account used to be a common convenience that banks extended to customers. However, the banking crisis has led many to abandon the practice. Here’s a closer look at why free checking is quickly becoming extinct.

Banks becoming less user-friendly

It wasn’t long ago that free checking was expected when you signed up for an account at your local bank. According to Bankrate, things have definitely changed. A recent survey found that only 45 percent of non-interest checking accounts are free now, which is down from 65 percent just one year ago and 76 percent in 2009. Many checking accounts will waive fees if you maintain a high minimum balance or use direct deposit for your paycheck, but such conditions didn’t used to exist.

Blaming the government

While this may sound like an excuse offered up by a banking PR person, regulations set forth by the Consumer Financial Protection Bureau have hampered banks’ ability to make money. Bankrate notes that banks are losing billions of dollars because the CFPB is not allowing them to charge overdraft fees unless the consumer grants prior permission. Furthermore, regulations have cut off excessive bank fees resulting from bank card overdraft

Ajay Nagarkatte of banking industry research company BAI Research says all of this and more have hit the free checking model like a ton of bricks.

“The entire model of free checking has been turned upside down because of new regulations,” said Nagarkatte.

Nessa Feddis of the American Bankers Association sees a clear chain of cause and effect.

“When the government intervenes in markets and eliminates a source of income, a bank, like any other business, has to find some way to make up that lost income,” she said.

Even though consumers lend banks money free of charge so they can loan it out and reap the benefits of interest payments, banks hunger for more.

Consolidation eliminates competition

In a survival of the fittest environment, large banks tend to swallow the smaller banks that cannot distinguish themselves enough to survive in harsh financial climates. Consolidation leads to a lack of competition, which in turn can lead to monopolistic practices regarding fees. It is only because of the involvement of the CFPB that bank fees have not spiraled beyond the pale.

Ed Mierzwinski of the U.S. Public Research Interest Group told USA Today that banks gouge captive consumers because they can. As too few consumers exercise their right to choose another financial institution, banks have little or no incentive to charge less.

Sources

Bankrate

Consumer Reports

NPR

USA Today

The Week

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