When JPMorgan Chase & Co. became the last of the nation's four biggest banking companies to announce that it was doing away with no-strings-attached free checking accounts, the question naturally arose among bankers in general: Is totally free checking dead?
Well, if it isn't dead, it is at least grievously wounded by recent and pending regulatory actions. By requiring that customers opt in to programs that let banks charge overdraft fees, the federal government cut away a primary funding support that made totally free checking an attractive product for many banks. And pending rules to slash the interchange fee banks charge on debit card purchases are expected to be every bit as painful.
"Everybody who has a free checking account has a cell phone, and they are happy to pay $50 a month for it. The industry has been giving away a product that we really need to be compensated for," said H. McCall Wilson Jr., the president and chief executive of Bank of Fayette County in Moscow, Tenn.
"As an industry, we have done it to ourselves," said McCall, who also is chairman of the American Bankers Association's Community Bankers Council. "It was a race to the bottom, and now we're losing money on a lot of small accounts."
But not all community bankers share McCall's concern.
"We ran the numbers, and free checking still makes sense based on the demographics of our clients and their behavior," said Charles G. Brown 3rd, the chairman and CEO of Insignia Bank in Sarasota, Fla. "We will be putting on our signs, 'Free checking continues to live here.' "
Though conceding that offering free checking costs the bank a certain amount of money and manpower, some community bankers challenged the idea that the cost is prohibitive.
"There is no capacity issue for us when it comes to adding … free checking accounts," said Randy Ferrell, the president and CEO of Fauquier Bank in Warrenton, Va. "We hope that providing free checking gives us the opportunity to provide them with other services.
"It doesn't cost that much, and we don't have to hire new people to do it, so we don't see it as a burden at all," Ferrell said. "We are glad to have the free checking accounts, and we will continue to have them and offer them as long as we see them doing what we want them to do."
Ferrell said that employees in his $600 million-asset community bank are very close to their customers. Getting people in the door through free checking allows bank employees to identify customers' other needs.
"If you are fortunate enough to have your customer's primary checking account, they are going to do other business with you," he said.
Despite the optimism of bankers like Brown and Ferrell, industry representatives paint a bleak picture, insisting that the rules make free checking accounts an untenable product for banks.
"It costs a lot of money to open and maintain a checking account," said Jim Chessen, the ABA's chief economist. "It costs between $150 and $200 to open an account, and the annual cost of providing a checking account is between $250 and $300. One way or the other, you have to cover those costs."
And covering those costs, he said, essentially means doing away with free checking.
"I think it gets very difficult to make up for the loss of that revenue without going to charging by account or having minimum balances or limits on debit card use," Chessen said.
To be sure, many institutions, including the very largest, will continue to offer "free" checking to consumers who meet certain criteria, such as agreeing to have paychecks deposited automatically, maintaining a minimum balance or having a mortgage or other major relationship with the bank.
But for small-dollar account holders, the future of no-strings-attached free checking is less clear. Many industry analysts are also quick to pronounce that particular product dead.
"Given typical branch banking structures and costs, I don't think that model is going to support free checking," said Aaron Fine, a partner with Oliver Wyman in New York. "The impacts are too severe and I don't see anything banks can do to replace that revenue."
"The trend is away from free checking," said Paul Schaus, president of CCG Catalyst, a Phoenix consulting firm. "Interest rates are low, insurance premiums are high and unprofitable customers aren't attractive."
At least some analysts see a future for free checking as a means by which small institutions, credit unions and growth-hungry midsize banks can continue to differentiate themselves from their larger competitors.
"Free checking is no longer the commodity that it was in recent years, but it is not going the way of the dinosaur either," said Greg McBride, senior financial analyst with Bankrate.com in North Palm Beach, Fla.
The news that the big banks were doing away with stand-alone free checking was hardly a surprise to anyone who pays attention to how competition among banks works, McBride said.
"Large banks were the last to jump on the free-checking bandwagon, and they are, not surprisingly, the first to jump off," he said. "The largest, most dominant banks don't compete on price. It is the smaller institutions who have to fight for every little bit of market share who tend to compete more aggressively on price."
As a result, McBride said, stand-alone free checking accounts are likely to remain available to many consumers.
"Smaller community banks, credit unions and online banks will remain fertile ground for free checking," he said. "It is certainly going to diminish, but people are still going to offer it from a competitive advantage standpoint."
The bankers' own confidence aside, many industry analysts still question the ability of smaller institutions to reap significant gains, even if they are able to peel off account holders from larger institutions.
"Can community banks go after those clients?" Schaus said. "In a better environment, yes. But most of them are not trying to grow right now, and the others are just hanging in there. They would like to get rid of their unprofitable clients and attract more clients."
Schaus said that he thinks it is at least plausible that community banks could better mine a pool of free checking account holders to identify those who can be made into profitable customers, but he said it isn't clear that most would be willing to make the investment it would take.
"It comes down to the tools and the systems the bank has in place and what the bank is willing to do to," he said. "It doesn't just happen."
Bart Narter, senior vice president in the banking group at Celent, said the banks that offer free checking will be peeling off the "most price-sensitive" customers from other institutions.
Others question the long-term viability of continuing to offer stand-alone free checking at any bank, regardless of size, because of the increased attention many such account holders require, frequently due to repeatedly overdrawing an account.
If banks can't convince consumers to opt in to overdraft protection programs, and as a result, see overdraft fees plummet, they say making the case for retaining those customers is difficult.
"Typically, these customers who are serial overdrafters would have four overdrafts a month, but they don't have any other relationships," said G. Michael Flores, president and CEO of Bretton Woods Inc., a management consulting firm in St. Simons Island, Ga.
"It is a one-account type customer, so if the bank has not had any increase in opt-in rates and they see the consumers with new awareness of avoiding overdrafts, I don't see the business case for community banks offering free checking," he said.
Another potential hurdle is a proposal by the Federal Deposit Insurance Corp. to require banks to offer personal consultations to any customers who overdraw an account more than a fixed number of times in a given year.
"If that guidance goes through, I have made the strategic decision to revisit our free-checking design because it creates more of an overhead burden," Insignia Bank's Brown said.
But, future regulatory changes aside, banks that continue to offer free checking may have a little bit of history on their side, Oliver Wyman's Fine said.
"The last time this happened, the banks that got rid of free checking were viewed as expensive by the public," he said. "In this era of information, I would think that is less likely to carry the day, but we are going to see a lot of change, and a lot of action and reaction from banks over the next 12 to 18 months as they try to figure out where to go."
