How free are those 'free' checking accounts?

Protesters march in downtown Los Angeles. The demonstrators are marching to major bank offices to protest the role of Wall Street banks in the federal budget crisis and in solidarity with protesters in New York and other U.S. cities.

Tess Vigeland: We've been hearing for months that banks would have find new sources of revenue, now that financial reform measures are kicking in. Aaaaand... it's happening. Just this past week, several announced new fees. You don't like it? Neither does President Barack Obama.

President Barack Obama: People have been using financial regulation as an excuse to charge consumers more, right? I mean, basically the argument they've made is, "Well, you know what? This hidden fee was prohibited, and so we'll find another fee to make up for it." Now, they have that right, but it's not a good practice. It's not necessarily fair to consumers.

And they do have that right. Banking is a business. So why do we think we should get their services for free? Sally Herships has more.


Sally Herships: We are so used to free checking. But actually it hasn't been around all that long.

Claes Bell works for Bankrate.com. He says just over a decade ago, only one out of every eight checking accounts was without monthly charges. But by two years ago, three out of every four were free.

Claes Bell: That's a big change, but a fairly recent one. And now we're seeing it go back to status quo of most banks are either going to get you to meet certain conditions to get free checking or they're going to be charging you a fee.

Bank of America says it's going to start charging customers $5 a month to use their debit cards. Wells Fargo says it will also begin trying out a new debit card fee, for $3. And Citibank announced changes to checking accounts which could see customers paying new fees beginning in December.

Bell says for bank accounts that do have fees the average cost has nearly doubled over the last year, to four dollars and change. But let's back up a minute: Is free checking really free?

Mitchell Peterson: Checking has never technically been free. Banks don't give away services for free.

Mitchell Peterson is chair of the of the finance department at Kellogg School of Management. He says there are two ways we typically pay our banks. The first falls under the category of "oops."

Mitchell Peterson: Most of us never plan to bounce a check. Most of us never plan to violate that low balance. And I plan to be good at following directions -- and then I don't.

To understand the other way we pay, Peterson says look at all the bank branches out there and ask, "Why did the banks build so many?"

Peterson: One of the reasons was it was a way to harvest deposits, which were seen as a cheap form of financing.

We put our money in the bank and the bank pays us a relatively low interest rate. Then it goes out and lends at a higher rate. But when the bank lowers our interest rate to make more money on its loans, most people don't perceive that as a charge.

Peterson: So instead of paying $5 a month, we receive lower interest.

And these days whatever interest bank accounts earn is lower than inflation. That's another charge.

Jeremy Tobacman teaches business at Wharton. He says many people don't register this cost because of what's called "money illusion."

Jeremy Tobacman: "Money illusion" refers to the typical inattention to differences between real rates and nominal rates.

The nominal interest rate is what you get. The real rate is what you get when you subtract inflation. If you're not keeping up with inflation, you're paying the bank.

The new fees announced by the banks are just more transparent charges. They've come in the wake of new regulations reducing overdraft fees and the amount banks can charge merchants for purchases made with plastic. Citibank plans to charge its basic checking customers $10 a month, unless they maintain a minimum balance of $1,500 or make one direct deposit and pay one bill online each month.

Steve Troutner: So we spent the last several months talking to customers who bank with us already as well as to prospects who bank with other companies. And really the focus of our conversations with them was "what do you value the most in banking?"

That's Steve Troutner, head of banking products for U.S. consumer banking at Citibank.

Troutner: And what we heard clearly from customers over and over again was "make it very simple for me, give me flexible choices and give me worry-free pricing. So that I know what I'm going to pay for the services that I get. And if it's important for me to not pay service fees, do I have clear options that allow me to do that?"

So Citi opted for monthly account fees instead of charging for online bill pay, debit card purchases or lining up for a teller. But plenty of customers are already voicing their anger at the flurry of new bank charges.

Adam Vajda was using a Bank of America ATM in Manhattan. He says he kind of understands that banks have to make up for lost revenue.

Adam Vajda: I still cannot help feeling that if I actually took a look at those balance sheets, the banks are still making good amounts of money at my expense.

Vajda says he has accounts at three different banks; one of which the day before informed him that it was raising his minimum balance for free checking by $10,000.

In New York, I'm Sally Herships for Marketplace Money.

About the author

Sally Herships is a regular contributor to Marketplace.

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