A recent article from the Wall Street Journal notes that Bank of America has plans to cut its no-frills free checking accounts. That is, if you’re an ordinary consumer who doesn’t keep vast amounts of cash in your checking account, you could see the end to free checking. Here’s why.

Who’s Really Paying for Your “Free” Checking

As the system currently stands, many banks offer free checking accounts to any customer who’s interested and has money to deposit. Sources note that these accounts have been popular in the last decade with middle-class Americans and lower-income Americans using banks for the first time. But:

• Banks must pay: It reportedly costs a couple hundred dollars per year for a bank to maintain a customer’s checking account, and banks aren’t doing that maintenance for free out of the goodness of their heart.
• Banks collect fees: One of the reasons free checking accounts have become so pervasive is that banks are able to subsidize these “free” accounts with fees they charge – for overdraft protection, for over-limit automatic transfers and for other violations of the terms of an account. What happened, then, was that the customers who frequently incurred fees on their accounts essentially paid for both their accounts’ maintenance and that of people who incurred no such fees.
• The Credit CARD Act limits those fees: Because the consumer protection legislation passed last year, banks are now limited in what fees they can charge, how much those fees can be and how many times they can hit individual accounts. This means that banks no longer have a reliable source of income to finance the “free” accounts.
• The banks must charge: In order to comply with the Credit CARD Act and continue making a profit, Bank of America (and likely other banks) will soon charge a yearly fee for customers interested in having checking accounts there.

Not All Bad News

The WSJ article indicates that there might yet be hope for people who enjoy their free checking accounts and are less than enthusiastic about paying for something they used to get for nothing. Apparently, customers who have debit or credit cards linked to their accounts or who use online banking services with a certain frequency will still be able to get their checking without paying.

A Side Note

The free checking model works the same way as credit cards do: credit card users who are considered “transactors” (that is, they use their cards to make purchases and pay the balance in full each month) essentially get free short-term loans from their card issuers.

These free loans are subsidized (i.e. paid for) by card users known as “revolvers” (that is, those who let their balance carry over from month to month and end up making interest payments).

Be sure to read all mail from your bank carefully in the coming months to see if any changes in terms will be applied to your accounts.

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