Recently enacted legislation aimed at helping the consumer by limiting overdraft fees on debit-card transactions is going to have the unintended consequence of promoting the demise of the free checking account. According to the American Bankers Association, the cost of opening an account runs between $150 and $200 and the yearly cost of maintaining an account runs between $250 and $300. It goes on to say that banks are able to provide these accounts for free or at a very low cost because of revenue received from other sources:
- Lending activities
- Interchange income on debit-card transactions
- Overdraft fees
- Sales of other services
Keep in mind that banks have been hit in the last couple of years with huge assessments to cover current and future FDIC expenses and that cycle of paying continual assessments is not expected to end soon.
Now that lending activities are at a crawl or a standstill and interchange fees and overdraft fees are being severely reduced, the banks’ profitability is going to suffer in a major way. So what is a bank to do?
I read in my local paper that Bank of America attracted attention recently by scrapping overdraft coverage for everyday debit-card transactions. Don’t get overly excited that this is some great thing they are doing for the consumer. Yes, it will benefit those customers who can’t seem to get off the bank’s overdraft list, but the rest of the clients who can balance their checkbooks properly will end up paying for those who apparently can’t. The expected loss of fee income from overdraft services already has prompted Bank of America and others to investigate ways for generating fee income from other sources. That’s likely to mean fees or restrictions on services that had been free. “Obviously, we will look to mitigate this impact,” said Neil Cotty, the bank’s interim CFO. “While we are not prepared to detail the mitigation today, you should expect that customers will have a choice of banking more efficiently, bringing more relationships to us, or paying a maintenance fee.”
I have to say that I am glad to see Bank of America being honest and transparent about their intentions.
Look for the banks to pass on their additional costs to their clients and observe as the banks find ways to make up for lost revenue through new assessments – such as fees on (previously) free checking.