The 'R' May Be Dropping From 'Free' Checking In 2011

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BIRMINGHAM, Ala. — A number of industry analysts are predicting that 2011 will finally be the year in which a large number of credit unions pull the plug on free checking.

Income statement pressure from NCUA assessments and new overdraft and interchange rules will prompt a majority of CUs to move away from free checking as the accounts are structured today, to products that are free only if the member is profitable, analysts project. CUs will also institute new checking accounts that charge fees but return additional services, such as accidental death and disability policies, identity theft protection, and rewards cards, they forecast.

"My prediction is that you will see all financial institutions moving to tiered pricing on checking that will still leave a basic free checking product, but it will be so severely limited that few people will elect to use it," predicted Dennis Dollar, principal partner at Dollar Associates here. "It will probably require a certain number of debit transactions per month and will limit the number of checks someone can write, require all electronic communications, etc." In addition to a very limited free account, Dollar sees two other types of checking tiers. "One may charge $2 a month and you get accidental death and disability coverage with your account as long as you take e-statements. And there could be a $5-a-month product that will give you a lot of extra services, such as identity theft protection and rewards."

Change Is Coming

Dollar said he is aware of one company that has designed the latter, and he believes that is a sign that change is coming. "When you see vendors making changes in what they offer, you know a shift is on the way."

Dollar said Bank of America's move last year to eliminate free checking could be the catalyst to get other financial institutions moving. "Free checking has been on life support ever since the Fed's new rules on overdrafts and the Dodd-Frank hit to interchange revenue, but no one wanted to be the first to bring an end to free checking. Now Bank of America has pulled the plug and a cascade of financial institutions will very likely follow in 2011."

According to Jay Johnson, EVP at the Washington-based Callahan & Associates, the new checking landscape will require members to take additional products to get free checking and CUs will deepen relationships. Johnson believes credit unions will not be as quick to add fees or raise them, as much as they will add requirements to get free checking. "I think you will see checking accounts built more around relationships than pure transactions. I think credit unions can retain the free checking space and make their accounts valuable to consumers without adding a lot of fees."

Bill Handel, VP of research and development for Raddon Financial Group, Lombard, Ill., also sees the movement away from free accounts, noting the last 10 years were "the decade of free. Not only free checking, but no annual fee credit cards . . . ," said Handel, who sees continuing regulatory pressure forcing more credit unions to add fees.

But when it comes to free checking, Handel also believes credit unions will try to hold onto the free space by developing free checking accounts that have relationship pricing and are offered at no cost if the member is profitable. Handel, too, thinks there will be a faction of credit unions that will not change their free checking accounts as a means to separate themselves from competition and gain market share.

NAFCU's chief economist Tun Wai predicts a movement away from free to offset declining revenue is likely, but agrees that many will cling to free as a means to increase membership. "It's a marketing strategy one has to think about. I know a very large credit union that says under no condition will it give up free checking. You have that kind of commitment out there in terms of serving members."

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