Author: Mallory Avery
New Orleans, LA
It’s the end of the world! Oh, wait, that’s in December. It’s only the end of free checking. Many major banking institutions are going to be instituting costs holding a checking account.
Some history: This is not the first time that banking institutions have charged for checking services; in the 70’s it was very common for checking accounts to be accompanied by fees. Then, as a way of competing with each other, banks kept dropping their checking account fees to try to gain more customers. Since then, checking accounts have been mostly free, punctuated by attempts by the banks to reinstitute fees, and customers getting upset and going to different banks.
Cut to today. The financial crisis has led to people knocking on the government’s door asking for financial reform. The government has decided to tackle overdraft fees. Overdraft fees are those fees incurred when you withdraw more from your account than you have. Financial recession can lead to less money in your account than you thought, and rising prices can lead to you taking out more than you would expect, and voilà, you get hit with an overdraft fee. Now, people didn’t think this was fair and asked the government to fix it. And the government answered, setting up regulations to make overdraft fees illegal. Why is this a problem? Well, according to the Consumer Federation of America, banks earned 38 billion dollars in overdraft fees in 2009, and 86% of banks impose such charges. And how does this connect to the end of free checking?
Bank services, like offering checking accounts, cost money. Banks hire people, purchase technology, and invest in research to try to bring their clients the best services possible. Having a checking account means that your money can’t make the bank money through investment, since it has to be sitting there for you to pull out at any moment. A savings account may pay for itself if the bank invests and lends your money out wisely. No such thing can be done with checking account money. Checking accounts are actually non-profitable; banks don’t make a profit on offering checking account services. So how have they been paid for? Overdraft fees, in large part. But overdraft fees are going away now, per government mandate. So the banks need to supplement their income somehow, and checking account fees is the way they’ve decided to do it. In other words, the government has cut off one stream of revenue for the banks, so they’re supplementing it with another.
Why has everyone gotten all worked up about this? This may have something to do with the idea of punishment. Overdraft fees are punishment. You take out too much, you get hit with a fee. It’s simple, self-contained, and rather damaging to an economy whose strugglers are already only barely hanging on. And when these strugglers complained, the government made the punishment illegal. The bank’s solution is to charge for having a checking account. This is still a punishment: you own a checking account, you get hit with a fee. However, this punishment is nonsensical. In the eyes of the consumer, they’re not doing anything wrong or different and are suddenly getting punished for it, and that feels even worse than getting punished for something you did do wrong. Now, had these fees always been in place, this wouldn’t be the reaction; these fees would have been stated up front and accepted as a part of the exchange of money for services. Since they’re being added on later, consumers feel gipped, punished, and upset. They didn’t do anything to deserve these extra fees; they don’t understand why they should have to pay more.
So now that you know what’s going on and why, what can you do to avoid these fees? One option is always to switch to another bank. This may be the best option for the whole. As twitter follower Nic Fornario pointed out, “this is going to make banks more competitive, because people will be looking for cheaper fees.” Recall that this is how fees disappeared in the first place. Banks were competing for a larger share of the market, and did so by lowering and eventually dropping fees on checking accounts. If everyone avoids banks that charge for checking accounts, the banks will have to lower or eliminate their fees to compete and the checking account fees would be gone again. However, there are a couple problems with this. On a personal scale, it is sometimes difficult to transfer banks, especially if you’re putting time into researching them. This time and money spent may be worth more than the bank fees themselves, depending on the circumstances. On a larger scale, the banks are businesses, and just like any other business, they need to at least make as much as they pay for a given service, and if they cannot make money through checking account fees to pay for offering checking accounts, they will find another way to charge consumers, and the next idea may be worse.
An option is to switch to a local credit union. Very few credit unions have checking account fees. However, they also have fewer services, are less flexible, and are not everywhere. However, these smaller institutions are closer to the consumer and more receptive to the needs of the community. Credit unions are not necessarily going to give you big returns or offer you large loans or mortgages, but they will keep your money safe and growing at a steady and sustainable rate.
Another way to avoid these fees is what Greg McBride, an analyst with the personal financial website Bankrate.com, calls earning it. Banks are providing different levels of services with different fees attached. Additionally, they are discounting for those who hold a certain minimum balance, hold other accounts, and exclusively use online checking. Through research, a person could find the combination of services and discounts that charges the least. This, however, takes time, money, and patience that most people don’t have.
In the end, whether the populace decides to abandon banks imposing a checking account fee or not is one thing. Regardless, it is not the end of the world. These fees have been tested in a smattering of states to see what the effect will be, and none of these states have collapsed yet, economically or otherwise. While you may end up feeling gipped as you’re getting hit for just holding a checking account, recall that this is a service that is being provided and it has to be paid for somehow, and if the government is going to forbid the banks’ previous money making methods, they have to and will find other ways of making that money.
Author: Mallory Avery