The Death of Free Checking

January 26, 2009

The latest edition of BAI Banking Strategies Magazine has an article by Aaron Fine, David Goldberg, and Tony Hayes titled “Sweeping Away Free Checking?

Proposed changes in the Unfair and Deceptive Acts or Practices (UDAP) statute could reduce the profits that banks now make on overdraft fees on transaction deposit accounts and penalty interest rates on credit cards. This reduction in fee income, say consultants at Oliver Wyman, could in turn prompt banks to take another look at their free checking programs, which are essentially subsidized by overdraft fees. The authors say financial institutions should prepare themselves for this eventuality now by developing new checking account and credit card strategies

Recently Colin Henderson at thebankwatch.com lamented that regulating banks like utilities will stifle innovation.  If banks are going to wait for regulators to tell them when it is time to implement new strategies, then they should be regulated as utilities.

If this regulation passes, it will be the final nail in the coffin for free checking accounts. Yes, free checking accounts are profitable, but they no longer differentiate your bank from others.  Some banks have come to terms with this and are pushing accounts that charge you for writing checks.

PNC offers a virtual wallet product that bundles several types of accounts and charges for checks. It does not charge overdraft fees if overdrawn amounts can be transferred from another virtual wallet.  This type of account probably relies on interchange revenue more than overdraft fees.  Accounts like this will continue to proliferate as banks continue to fight for deposit dollars, and customers and the government continue to increase their scrutiny of overdraft fees.  If  true mobile wallets ever become a reality, we might do way with checking accounts all together.


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