Small banks and thrifts in recent years have offered free checking to differentiate themselves from giant competitors, but more of the largest banks are now doing the same.
The trend has accelerated over the past year as banks and thrifts have vied for the billions of dollars of deposits flowing in from customers fleeing the stock market. Meanwhile, disappointing results from investment banking, asset management, and other market-sensitive businesses have led the largest banking companies to refocus on traditional strengths, such as deposit gathering and other retail activities.
"I think there is a realization that deposits are a very important product," said Gordon Goetzmann, a managing vice president at First Manhattan Consulting Group in New York, which advises banks on products and trends.
"If you went back two, three, or four years ago, the real buzz was around investment management or investment banking and capital markets," he said. Since "those have hit the skids, the question became: Where are we going to get the growth?"
Most banks have long offered free accounts to customers who maintain high balances, but just five or six years ago savings and loans and community banks pioneered the idea of free checking as it is commonly understood today: a basic account without monthly fees, per-check charges, or minimum balances.
Until now larger banking companies have been slow to embrace the concept, in part because of worries about how to make up for lost revenue, Mr. Goetzmann said. Besides a desire to boost deposits, increased competition from peers and from smaller banks has chipped away at big banks' reluctance, he said.
Nancy Bush, an independent analyst who runs NAB Research LLC in Annandale, N.J., said big banks are not "left with a lot of choices" about whether to offer free checking. "It's been a premier product with some of the smaller banks, and it's been very successful."
Mr. Goetzmann says that now about two-thirds of the top 30 banks offer some version of free checking, up from just a handful four years ago. "For the other 40% that don't have anything, a fair number of them are internally debating that right now."
Wachovia Corp. has joined the free checking trend, however reluctantly.
At a New York conference last week sponsored by Citigroup Inc.'s Salomon Smith Barney, Robert Kelly, Wachovia's chief financial officer, said that the Charlotte financial services giant had been holding off on offering it but decided to drop the monthly fees because it would help customer acquisition and profitability.
Benjamin P. Jenkins 3d, Wachovia's president of consumer and commercial banking, said in an interview last week that it has been testing free checking in some Georgia and Florida markets over the past year and will eliminate checking account fees throughout its East Coast network this year.
Wachovia has begun a major marketing campaign following First Union Corp.'s September 2001 purchase of the old Wachovia. The post-acquisition strategy has centered on acquiring customers by adding branches in high-growth markets, boosting advertising and marketing, and introducing products such as free checking, Mr. Jenkins said.
Last week it announced plans to add up to 130 branches in New York and fast-growing Southeast cities over the next three years, though 200 or so overlapping branches will also be closed.
Meanwhile, large banks that are already offering free checking are beginning to tout positive results, such as an increase in new checking accounts.
Bank of America Corp., which runs the country's biggest consumer bank, introduced free checking in May 2001 for those who deposited their paychecks directly into the bank, and then watched as customers flocked to its branches. It added about 193,000 net new checking accounts in 2001 and 528,000 last year.
At the Salomon Smith Barney conference, Kenneth D. Lewis, B of A's chief executive and chairman, said he hopes to double the number of net new accounts this year, to 1 million.
At Bank One Corp., about 30% of the accounts that have been opened recently have been free checking ones, James Dimon, its chairman and CEO, said last month during a conference call with analysts. Those accounts helped reverse a four-year decline and produced a net gain of 45,000 accounts in the second half of the year.
Like B of A, Bank One requires account holders to sign up for direct deposit to qualify for free checking, and Mr. Goetzmann said that most of the large banks that offer such accounts have similar requirements. One reason is that direct deposit helps banks hold on to customers.
Mr. Dimon said that customers who have free checking and direct deposit are "much more likely to be stable than [those who have] just free checking, because it probably means it's your primary operating account."
Both B of A and Bank One also say they can make up for lost revenue by developing deeper relationships and selling more products.
But there is another attraction that banks have not discussed much: fees.
"Free checking is something of an oxymoron," said Gerard Cassidy, an analyst who follows the large banks for Royal Bank of Canada's RBC Capital Markets division. "Though technically it's free to the customer, banks quite often make a fair amount of money off those deposits with [other] fees" such as charges for bounced checks or excessive ATM withdrawals.
Some companies have chosen to limit how long customers can enjoy free checking without meeting minimum balances or other hurdles.
FleetBoston Financial Corp., for example, offers free checking for the first three months only. "We compete on the basis of value and not pricing," a Fleet spokesman said. "We're convinced that, after the first three months, consumers will see the value of the relationship."
