Bank of America and Other Banks Looking to Eliminate Free Checking

Starting in November of last year, the Federal Reserve and Congress enacted a series of reforms that radically altered how banks make money. The biggest change required customer consent before overdraft charges could be automatically levied on ATM and debit card transactions that overdrew an account. It was estimated that banks made $27 billion per year on overdraft fees alone. Credit card legislation and other proposed regulations will further erode banks service fee income.

The hit to bank's bottom lines are significant. Bank of America for instance, expects to forego $500 million in income in 2011 because of the discontinuation of its overdraft program.

Banks aren't going to just let this revenue and income go out the door. Baanks are scrambling to find other sources of revenue and many analysts believe free checking may be a casualty. Free checking won't exactly disappear but the threshold required to receive free checking will rise. According to the Wall Street Journal, Bank of America has ruled out a flat fee for all customers but is developing a tiered structure of fees based on a customer's deposit level and the number of products they hold with the bank. For example, someone with a largely dormant checking account that has only $500 in it might be assessed a monthly fee. A customer with an active checking account who also has their mortgage with Bank of America would most likely pay nothing.

And Bank of America is not the only bank headed in this direction. Fifth Third Bankcorp dropped its free checking account last year. TCF Financial, which built its business on free checking, has eliminated a totally free account and now requires a certain balance threshold to waive the minimum feee.

The Journal article also had some interesting stats. It costs a bank between $250 to $300 per year to maintain a checking account. Approximately 50% of a bank's accounts are unprofitable. I know from my banking days that the least profitable account was one that had low balances and high activity - think college students.

So what does this all mean for savers? Maintaining branches costs the banking industry $80 billion per year. That cost alone has to be recouped. Online banks do not have the expense. Banks also have to answer to their shareholders who expect a certain rate of return. Credit Unions do not have the same pressure to be profitable. Conclusion: both online banks and credit unions will offer better deals in the future and continue to grow in popularity.

The impact to low-income customers remains to be seen. While low income customers benefited from free checking accounts, the also didn't like the unpredictability of overdraft fees. For many, a modest service fee may be more economical and manageable than expensive overdraft charges.

The large banks will continue to attract consumers who want the convenience of an ATM at every corner, access via their iPhone, and the most up-to-date online banking.

The split between price and convenience that has already started to develop between the online banks/credit unions and the major banks is about to get more pronounced.