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Enlarge This ImageFree checking may be nearing extinction at large banks as they attempt to recoup lost debit interchange revenue, but at smaller institutions the product is not even an endangered species.
Nearly two thirds of big banks have eliminated free checking since the end of 2009, adding fees or changing the terms of some 4 million consumer deposit accounts, according to the research firm Moebs Services. The cuts were largely in anticipation of the Federal Reserve Board's new restrictions on debit interchange, which will slash the revenues that banks earn every time their customers shop with their debit cards.
Since the regulations were proposed in 2010, bankers and payments industry executives warned loudly and repeatedly that they would no longer be able to afford to offer free checking and debit rewards. Many of the biggest banks, including JPMorgan Chase & Co. and Wells Fargo & Co., now are making good on that threat.
But free checking is still alive and well at most banks and credit unions with less than $50 billion worth of assets. Community bankers say they will continue offering free checking for the foreseeable future, even if they're not entirely happy about it.
Charging for checking accounts is "just not going to be possible for us. … We'd lose the accounts," says James Maloney, Chairman of Mitchell Bank in Milwaukee.
"We're kind of in a holding pattern, and until we know anything more, we're just going to live with it," he says. "It's been a discussion for the last three or four months at the board, and everyone seems to be of the consensus that we shouldn't be the one to start charging."
Like most bankers, Maloney dislikes the Durbin amendment on debit interchange. Under that provision of the Dodd-Frank law, the Fed capped debit interchange fees at about 24 cents for the average transaction, almost half the previous average of 44 cents.
Big banks including JPMorgan Chase & Co. and Bank of America Corp. have since cut rewards programs, discontinued certain types of accounts, or started charging customers for deposit accounts that were once free. Wells Fargo & Co. said this month it would start charging some customers $3 per month to use their debit cards, as part of a test in some states.
But unlike their largest competitors, Mitchell and other community banks have few immediate options for recouping their lost debit interchange revenue. For the smaller banks and credit unions that have long relied on close relationships with their customers and local communities, charging new fees could be tantamount to suicide.
"To tell our customers that we're going to start to charge them when we have the free checking, we think that might be a big problem," says Maloney.
Some community bankers see free checking as their latest opportunity to set themselves apart from the purportedly "Too Big to Fail" banks that have become lightning rods for public criticism since the financial crisis. The ultimate goal, of course, is to poach those big banks' customers.
Noah Wilcox, chief executive officer of Grand Rapids State Bank in Minnesota and director-at-large of the Independent Community Bankers of America, says his company has benefited from the larger banks' struggles.
"We've certainly picked up business. I operate in a market that has multiple systemic institutions operating. … This whole entire crisis really has caused consumers to pay a little closer attention to where they put their money and how that organization behaves," he says.
Marcus Schaefer, CEO of Truliant Federal Credit Union in Winston-Salem, N.C., similarly calls free checking "an opportunity for us to have another way of differentiating ourselves from large financial institutions."
