Why B of A is discontinuing free checking for online-only users

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Bank of America’s discontinuation of an online checking account that was free for many customers marks a notable milestone in the evolution of digital banking. As customers become more tech-savvy, the nation’s second-largest bank no longer needs to offer discounts to encourage the adoption of e-banking.

When Bank of America introduced the account in 2010, online banking was still in its early days. The account was free for customers who received their statements electronically and refrained from using tellers for routine transactions. Otherwise, they paid a monthly fee of $8.95.

Folks who were willing to ditch their old-fashioned habits could save over $100 in fees each year. The account was a good option for many low-income households, since they did not have to maintain a certain minimum balance in order to avoid monthly fees.

“It was designed in a different environment, when there was a small segment of customers who were looking for banking on the go,” said Betty Riess, a Bank of America spokeswoman.

Today, digital banking is no longer a service that consumers have to be prodded to use. Instead, it is widely viewed as an essential part of modern life, especially among young adults. B of A alone had 24.2 million active mobile-banking users at Dec. 31, or 12% more than it had a year earlier.

B of A stopped offering the online checking account to new customers in 2013 and has been discontinuing it for existing customers in waves. The final accounts were closed last week.

“In today’s environment, digital is a part integrated into all of our checking products,” Riess said.

Bank of America informed customers who previously used the online checking accounts that their funds would be moved into a Core Checking account. Those accounts cost $12 per month unless customers meet certain conditions, such as having a direct deposit of at least $250 per month or keeping a minimum daily balance of at least $1,500.

The $2.2 trillion-asset bank offers another consumer account that costs $4.95 per month and does not include overdraft fees, but customers would have to ask to enroll.

Bank of America is widely considered a leader in digital banking, and its decision to stop offering enrollment incentives can be seen as a sign of the strength of its technological offering.

“It’s just easier to use B of A’s app and online solutions relative to most community banks, and that’s a problem for community banks,” said Mary Beth Sullivan, managing partner at the financial services consulting firm Capital Performance Group.

Eight years ago, the introduction of online checking accounts likely helped Bank of America to reduce its expenses, since the accounts discouraged branch visits, helping the bank as it sought to cull hundreds of branches from its nationwide network.

Paradoxically, the discontinuation of those same online accounts also figures to help reduce expenses. That is because Bank of America has already pocketed the gains from changes in consumer preferences, and is now offering affected customers an incentive to enroll in direct deposit, which eliminates the cost of processing paper checks.

Bank of America Chairman CEO Brian Moynihan has said that the Charlotte, N.C., company needs to reduce its expenses by about $1.7 billion this year in order to meet a goal set in 2016.

“It costs about three times more to process manual deposits than direct deposits,” Dan Geller, an industry consultant, said in an email.

The elimination of online checking accounts also figures to result in the closure of many low-balance accounts that generated little revenue for B of A. The bank said earlier this month that 90% of its consumer deposits were in customers’ primary checking accounts, a percentage that figures to rise as a result of the changes.

In 2011, Bank of America faced a loud backlash over a plan to charge customers $5 per month to use their debit cards for purchases, and the bank eventually reversed course.

The bank’s decision to discontinue its online checking account has so far sparked far less controversy, though some 45,000 people have signed a protest petition at Change.org urging the bank to reconsider.

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