Big Banks Forget About Free Checking, and Don't Regret It

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Maybe Bank of America's (BAC) controversial decision a few years ago to charge for checking accounts was a smart idea after all.

Big banks continued to hike monthly maintenance fees on checking accounts over the last six months of last year, according to The average monthly cost of fees, at banks that charge monthly maintenance fees on checking accounts, rose 11 cents to $12.54 during that period.

The rates are higher at large banks, the study said. At banks with at least $20 billion of assets, the average monthly checking account fee was $14.49.

In spite of the price hikes, big banks appear to be retaining most of their customers, says Jim Miller, senior director of banking at J.D. Power.

"We just don't see customers flooding away from the big banks because they don't have free checking anymore," Miller says.

Things looked different in 2011 when B of A tried to assess a fee hike on checking accounts and then backed off after a widespread customer backlash.

However, most customers have many reasons to keep checking accounts at the largest banks, says Dan Geller, executive vice president at Market Rates Insight. Larger banks' more-numerous technology options and wider access through branches and ATMs usually win out, he says.

"The reality is, most people who say that they are going to leave [a large] bank because of maintenance fees on checking do not leave," Geller says. "The big banks are very sticky."

Those consumers who left big banks due to maintenance fees seem to have left a long time ago, Miller says.

"Customers who are price-sensitive have already moved," Miller says.

There have been conflicting studies on whether free checking is sharply on the decline, or whether it's actually gained traction in some segments of the market.

The percentage of big banks that offered free checking fell to 20.26% at the end of 2013, from 22.28% six months earlier, according to The number of small banks that offered free checking rose slightly in the same period, from 35.64% to 35.65%, and a majority of online banks, about 63%, continued to offer free checking.

But a December study by the Federal Reserve Bank of Kansas City said that free checking actually became more widely available after the Durbin Amendment took effect. That jibed with expectations that smaller banks could afford to offer free checking, as institutions with less than $10 billion of assets are exempt from the Durbin Amendment's debit-card swipe-fee price cap.

The Kansas City Fed report relied on data taken from a survey of 281 banks. Its report also said that big banks were much less likely to offer free checking than smaller banks.

Most large and super-regional banks charge for checking accounts. Pittsburgh's PNC Financial Services Group (PNC) in June became one of the last super-regionals to stop offering free checking.

The decision to dump free checking accounts is almost a no-brainer for big banks, particularly at a time when it's hard to earn good margins with rates so low, Miller says. If customers are going to hang around anyway, if you charge fees for checking, why not go after that revenue stream?

"It's tougher to make money now, so bigger banks are looking at how to offset some of that lost revenue," Miller says.

Some large banks, nevertheless, continue to advertise free checking, including the $56 billion-asset Huntington Bancshares (HBAN), in Columbus, Ohio, and $2.6 billion-asset Fidelity Southern (LION) in Atlanta.

RBS Citizens Financial Group, the $98 billion-asset unit of Royal Bank of Scotland, last month began offering a checking-account product that is very nearly free. The response has been overwhelmingly positive, says John Rosenfeld, head of everyday banking at Citizens. A Citizens customer can avoid all fees by depositing more than one cent per month in his or her account.

Bigger banks say that they aren't losing customers because they charge for checking, but that's likely not true, Rosenfeld says. The U.S. banking industry has long had high rates of customer churn, and that's still the case, he says. Whether a bank offers free checking is a key factor in consumer's decision, Rosenfeld says

"The amount of the monthly fee [on checking accounts] or how easy it is to avoid the monthly fee has become exponentially more important to consumers," Rosenfeld says.


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