Something You Can Bank On

"Free checking as we know it is ending."


That's the headline that greeted me this morning. Free checking as we know it is ending. Really?


It goes on to say, "The days when you could walk into a bank branch and open an account with no charges and no strings attached appear to be over. Now you have to jump through some hoops -- keep a high balance, use direct deposit or swipe your debit card several times a month." It notes at one major bank you must pay $8.95 a month to use a teller or get a paper statement.

I find this interesting news. In 1984 I was the Project Manager of the introduction of so-called 'Free Checking" in this area. There were a few other banks in the country doing it then, but not many. Such accounts never came without strings and were very like what this article is claiming is just happening. (Photo to the right is from newspaper coverage when the "free checking" was unveiled in 1984.)


True, we did not require a high balance. That would have defeated the idea behind the service. Offering free checking was not totally altruistic. The account was basically aimed at easing pressure from the Federal Government to provide affordable banking services to the people of low income.  This is not to say the bank didn't see some benefit to it.


It was calculated the service would cut the costs of maintaining very low balance accounts for one. It was also seen as a way of generating future "good" customers by providing an entry banking account, something like the idea of starter homes. You know, we would attract young people just beginning in life to our bank and reap benefits later as they became successful. Our first promotions were heavily aimed toward attendees at a large state university in our area and most of the early growth in the account was among those students. 


We also didn't require the use of direct deposit, since such electronic processing didn't really come into its own until the 'nineties. There was not a required number of ATM card swipes required either, only that all common banking transactions be done at an ATM. Common transactions would be all deposits, withdrawals, transfers and balance inquiries. It was also our first public step into check safekeeping. If you opened this account you would receive a monthly statement, but you would not get your cancelled checks with it. If you needed a cancelled check for any reason, you would have to call the bank and pay a fee to receive a copy of that check. (This was a benefit to the customer. No longer did they have to maintain their cancelled checks and copies were safe from fire or theft. If a customer had the rare check they needed, the bank would provide the copy and they wouldn't have to find a copier service. A couple of years later we were beginning to offer Check Safekeeping as an additional service to all customers.)


Now there was no monthly fee of $8.95 to bank with a teller, which could actually prove cheap. A condition of this account, as stated previously, was you did your everyday banking at an ATM and you never used a teller. The only exception to this was in cases where the ATMs were down. Other than that, if you used a teller there was a $2.50 charge each time (a fee that was raised quite higher in later years). Under this system if you used a teller 4 times in a month it would cost you $10. 


In other words, Free Checking from the beginning was an account that came with no bells and whistles, but always came with strings attached.




Half way through the article it shifted gears. Taking note of a range of laws passed in the past year by the Congress supposedly to protect me and you from "harsh fees", it brought up overdrafts.  It stated overdraft fees made up 12% of a typical banks revenue.  Oh yes, I well know that overdraft fees have been very lucrative to banks.


Overdraft fees are one of the biggest scams going.


A few years back, I wrote to a Congressman (who shall be nameless, so let's just call him for the sake of this post -uh-I don't know-uh- "Mike Castle") about the need to examine the various outrageous fees banks charged. So I get a reply back from this "Mike Castle" and it was a lot of boiler plate and gobbledegook and I realized this guy was a twit. His reply had nothing to do with what I had written. It wasn't long after that I wrote him again to say after voting for him in every election for over twenty years I would never vote for him again, and I didn't. Although I never thought it would happen this unnamed Congressman that we are calling "Mike Castle" for convenience sake was recently denied his attempt to retire in his old age to the Senate.


Banks will claim they charge overdraft fees to discourage customers from overdrawing. Ha!  Maybe thirty years ago they meant it.


Thirty years ago, when I really entered my banking career, overdraft fees worked this way and the fee was $10 (it may even have been less, but I'll stick with the $10). If I overdrew my account up to $9.99, I would get a notice, but no fee was charged. The rule was we would not charge a fee on anything less than the fee amount. If I overdrew by $10 to $19.99, I would be charged $5.00, half the fee. Any overdraft of $20 or more I would be charged the full $10 fee.


Then a-sudden, the overdraft fee began to escalate. It seemed every year it would go up some more -- $15, $17, $20, $25, until it became $35 and even $40 and $50 at some banks. The bankers would tell you it was necessary due to rising costs. Baloney, the cost of an overdraft was always relatively low and over the years the cost even shrunk as electronic processing became more sophisticated. Most of the costs associated with processing an overdraft were in collecting the fee from you. The only other cost might be a loss in overnight interest for selling or buying funds to balance the banks position. In the early eighties while interest rates were still fairly high, this might cost the bank three cents on your $100 overdraft. This is a long way from justifying a $35 fee.


So why did the fees keep escalating? Because overdrafts were a cash cow and every time the bottom line began to look a little frayed, the bank would raise the overdraft fee to sure it up.


This, of course, gave the lie that the fee was to encourage you from overdrawing your account. If you were a good, steady customer, they practically encouraged such behavior. You generally carried a decent balance, had other accounts with the bank and always repaid the overdraft quickly, so why not? They knew they would get the overdraft back plus the $35 fee from you. So do it every week if you like. In fact, that you could even get overdrawn proved you were considered a low risk customer. You were coded. If you were fairly reliable, you might be able to overdraw by $50. If you were a real low risk customer, you could overdraw as much as $200. Why would they allow you such lead way if they wished to discourage overdrafts? If they really wanted to stop overdrafts, they would simply not allow them to happen. You would just have return checks and refusals to honor cash withdrawals at the ATMs.


In the news article it stated Bank of American "started offering "emergency cash" for a $35 fee to customers who went to the ATM for withdrawals that would exceed their bank balance." According to BofA spokesperson 50% of such "customers opted to go ahead with the fee." That is really hilarious. How shrewd, they charge these customers an outrageous amount as an overdraft fee, but disguise it as a customer service. I wonder if they limit the amount of "emergency cash" you may take? If it is the limit of $200 and you pay it back at the end of the week, that's what, something like over a 900% annual interest rate?


We mentioned if you are a "good" customer they will allow you to overdraw (and make a nice return on their investment). What if you aren't such a "good" customer?  Then they return your checks and charge a fee for each returned. This is often as much as the overdraft fee per check returned. 


Now thirty years ago we had this policy in place. If a customer overdrew the account with several checks, then we would honor the lowest checks first. But the banks reversed this in later years. They ordered that the highest check be honored first. What did this do to you?


Let's say you had $40 in your account and three checks arrived, one for $40, one for $20 and one for $15. That is eighty-five dollars in total and you have but $40 in your account. In the old days, the bank would honor the $20 and $15 checks, leaving you with $5 in your account, which would not cover the $40 check. The $40 would be returned and you would be charge a return check fee, if this is $35, then you would owe the bank $35. That's still a nice profit to the bank.


In the new way it is quite different and even much more advantageous to the bank. They would apply the $40 check first. Oops, this leaves you with zero in your account and thus they return both the $20 and $15 checks, charging you the fee on each for a total of $70. 


Now can banks lose money on overdrafts? Certainly, if they have customers who overdraw the account and disappear. The bank never gets the overdrawn amount back nor do they collect the fee charged. But that doesn't affect you, the good customer, because you pay back your overdraft and your fee and the bank is very happy if you keep right on doing just that. (One thing we discovered about those potential future good customers at the college where we pushed free checking. A lot of them overdrew their accounts at the end of their college career and simply disappeared.)


I guess it is worth mentioning that in the article it spoke of customers leaving this bank because of the overdraft fee and how the bank did things to stop that desertion. Really? It was my experience that customers who often overdrew their accounts brought relief if they left. Habitual over-drawers usually kept very low balance accounts and were very profitable if at all.  You hoped they would leave. Now someone who was a high value customer might somehow overdraw occasionally (some rich people did this a lot actually), but because they were high value, the bank generally weaved the fee. Ordinary folk didn't get the fee weaved, unless they were good at complaining.  Some 'good' customers might leave, but where would they go? All the banks seemed to have pretty much the same policy and fees on overdrafts. 


If you don't think your banker wants you to practice bad financial habits, think about this. You have a credit card and you have reached the credit limit, lets say it is $1,000. You use the card anyway and make a $100 purchase or withdrawal $100 at an ATM and lo and behold it is approved. How can that be because you have used your limit?


Do you know the bank will generally allow you to go 10% above your credit limit? They don't advertise this. They will say they do this so you won't be embarrassed when you pay for that restaurant meal and you exceed your limit. How silly is that? What if you have already exceeded your limit plus 10%, who's worried about the embarrassment then?


No, it just makes good business sense, now doesn't it? If you exceed your limit, they get to charge the interest on that additional naturally, but more importantly, they get to charge an "over-the-limit fee".  Ten years ago that fee was $15, which means it is probably more now. That is another tidy profit for doing nothing.


Finally in the article it said, "Several banks have started charging $7.50 for paper statements."


"Paper and print costs around $2.25, add postage to that, and if banks are losing income from other avenues, someone has to pay for it."


Yeah, right, can't argue with that can we?


Yes, we can. A bank is a business like any other in that it builds its costs into its pricing. Do you have a monthly "service charge" on your account? I do. If you don't have such a charge, do you have a required average balance you must maintain? These fees or requirements have been calculated to cover the costs of such things as the monthly statement printing and postage. Those costs aren't something new that just popped out of the woodwork. The banks are just finding new fees to make up for any old fees lost due to the new financial legislation and this is something you can bank on.