With the Federal Reserve finally raising interest rates, credit unions are once again examining the future of free checking – a debate that’s been raging since at least 2009, when the number of institutions offering that service peaked and subsequently began to decline,
Plenty of credit unions, of course, still offer free checking, including $1 billion-asset Premier Members Credit Union in Boulder, Colo., which earlier this summer rolled out a new free checking account and market-linked certificates. The free checking accounts from PMCU will provide members with the opportunity to earn up to 4 percent APY on their first $2,000 by having $500 or more in direct deposit.
The credit union says that adding value, rather than profit, was the driving force behind their free checking offering.
"Based on our member feedback and internal product evaluation we saw the need for a simple yet rewarding checking account offering that would meet the needs of our members while at the same time rewarding them for their loyalty to PMCU," said Matt Rarden, chief operating officer of PMCU.
Rarden also noted that rates and fees remain a big component in the credit union's decision-making when sizing up their competition. "The credit union cooperative business model enables us to provide an advantage to our members in this area," he added.
But the larger issue surrounding free checking is complicated by the rise of other non-bank players in the financial services landscape, such as a recent report that revealed consumers might be willing to pay for a checking account offered through Amazon Prime.
Ron Shevlin, director of research at Cornerstone Advisors, claims this is a sign that free checking accounts “are toast.”
“Financial institutions need to establish a new value proposition for checking accounts in order to produce a core financial product upon which FIs can build and grow their customer and member relationships,” Shevlin said in a statement.
But Mike Moebs, a credit union economist and CEO of Moebs $ervices in Lake Bluff, Ill., maintains that even if free checking isn’t quite as vital as it was in the early ‘90s, it won’t be going extinct anytime soon. Moebs said free checking tends to move in patterns along with the economy: during strong economic times, consumers are more likely to open up new accounts, but are more likely to close or combine accounts during recessions. And the decline that kicked off in 2009 hews closely to the financial crisis, ensuring Dodd-Frank Act and more.
“The bankers were really hard pressed in expenses, as were the credit unions, and the bankers chose to get out of the free checking account business,” Moebs told CU Journal. “Roughly in 2007, we were at the peak of free checking.”
As of 2010, the
Offerings of free checking accounts have dwindled through banks, yet credit unions have continued to offer the service.
According to Moebs, one out of two banks offer free checking whereas five out of eight credit unions offer the service, though this metric does exclude credit unions not offering checking accounts at all.
The latest wrench in the works, however, is potential new legislation from U.S. Sens. Cory Booker (D-NJ) and Sherrod Brown (D-Ohio) released last month, which would
“The Democrats are on the Titanic and are swapping deck chairs on the paper overdraft business,” Moebs said. “They don’t see what’s happening in this business. The younger people, the core people, the underbanked and even the unbanked know that if they use electronics, they won’t encounter overdrafts.”
