Bank of America Corp. (NYSE: BAC - News) and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.
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Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.
Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don't generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.
"If you put $1,000 in a checking account and don't do anything with it, it will be hard to get that for free," says Sherief Meleis, a managing director at Novantas LLC, a consulting firm that advises banks.
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Some consumer advocates warn the new fees will whack consumers who now manage their bank accounts to avoid such charges. "Just because you made a lot of money on overdraft fees doesn't mean you deserve the income and doesn't mean you need the income," said Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, a liberal lobbying group, in Washington.
The transformation of checking accounts comes at a time when banks are bouncing back from the steepest financial losses in a generation and are facing new regulations. To accelerate that recovery and recoup losses from new banking rules, financial institutions are increasingly leaning on customers who don't now generate enough revenue for the bank.
More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.
The situation is especially critical for Charlotte, N.C.-based Bank of America, which stands to lose more revenue than most other big banks because it is in the process of dismantling its checking-overdraft program in the face of new restrictions. Starting this summer, banks must receive customer permission before they can charge for overdrafts. But Bank of America has decided to drop most of its program altogether. The nation's largest bank, as measured by assets, said largely because of recent changes to its overdraft policy, it will forgo $600 million in revenue this year.
To generate new revenue, Bank of America is quietly testing new pricing models throughout the U.S., with most changes expected in early 2011. Executives have ruled out a flat monthly fee for all customers and are developing a tiered structure that encourages customers to increase banking activity or use other services to avoid future charges.
Bank of America customers who only want a low-volume checking account will likely be asked to pay for it. Fees will likely be waived for customers who keep their balances high, use bank credit cards or tap its investment advisers. Bank executives declined to discuss specifics of the plan saying it is still being formulated.
"Customers will have a choice," Bank of America Chief Accounting Officer Neil Cotty told analysts in April, of "bringing more relationships to us or paying a maintenance fee."
Banks say they stand to lose billions of dollars in revenue from separate new restrictions on credit cards and overdraft transactions that were announced earlier this year. They could lose even more from legislation winding its way through Congress. The Senate version of the financial industry overhaul bill, currently being reconciled with the House version, contains an amendment that could limit fees banks charge to merchants for debit-card transactions.
Financial institutions warn that such a measure would trigger higher fees on basic banking products, as well as the loss of rewards programs that are tied to debit-card use. U.S. banks collected $9.4 billion in banking fees in the first quarter, representing 16.5% of all noninterest income, according to the Federal Deposit Insurance Corporation.
The new regulations could reduce the industry's service fee revenues by as much as 20%, according to Sandler O'Neill + Partners, an investment firm that specializes in the banking industry. Bank of America's service charges are 12% of revenues, excluding securities gains, and a 20% drop in such fees would mean a loss of $2.2 billion for the bank, according to Sandler O'Neill.
It isn't clear if new fees under consideration would completely make up for revenue that will be lost as a result of regulation. But banks aren't waiting to find out. "We're not sitting around to get caught off guard," Ed Barham, chief executive of Stellar One Corp., recently told investors. The Charlottesville, Va.-based bank, he said, is "driving other sources of revenue, of fee income at the retail side especially."
Fifth Third Bancorp, a large regional bank based in Cincinnati, dropped its free checking account late last year and now offers packages that bundle checking with other services, such as fraud alerts, debit rewards or brokerage discounts for fees of up to $15 a month. The fee can only be waived with a certain type of checking account.
TCF Financial Corp. (NYSE: TCB - News), a Wayzata, Minn., bank that used "totally free checking" as its slogan, eliminated its free checking account earlier this year and replaced it with an account that charges a monthly $9.95 maintenance fee. The bank will waive the fee if a customer keeps a certain minimum balance or has direct deposit.Banks typically didn't charge for checking in the 1970s, but began imposing fees in the early 1980s to offset higher interest rates they were paying on savings accounts. That changed in 1986 when TCF began promoting a free checking account. By the late 1990s, most banks had followed suit.
The offers of free checking without any minimum balance requirements attracted a new wave of low-income customers, who previously went to check-cashing stores. Some consumer advocates have warned that the elimination of free checking could drive some of those customers out of the banking system.
From the banks' perspective, though, many of those customers aren't profitable. The recent report from Celent suggested that banks can look beyond checking accounts to impose other fees. The report warned, however, that banks need to be careful not to alienate good customers.