Free checking as we know it is ending.
The days when you could walk into a bank branch and open an account with no charges and no strings attached appear to be over. Now you have to jump through some hoops - keep a high balance, use direct deposit or swipe your debit card several times a month.
One new account at Bank of America (BAC) charges $8.95 per month if you want to bank with a teller or get a paper statement.
Almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services.
It's happening because a raft of new laws enacted in the past year, including the financial overhaul package, have led to an acute shrinking of revenue for the banks. So they are scraping together money however they can.
No More Free Checking
Bank of America, which does business with half the households in America, announced a dramatic shift Tuesday in how it does business with customers. One key change: Free checking, a mainstay of American banking in recent years, will be nearly unheard of.
"I've seen more regulation in last 30 months than in last 30 years," said Robert Hammer, CEO of RK Hammer, a bank advisory firm. "The bottom line for banks is shifting enormously, swiftly and deeply, and they're not going to sit by twiddling their thumbs. They're going to change."
In the last year, lawmakers in Washington have passed a range of new laws aimed at protecting bank customers from harsh fees, like the $35 charged to some Bank of America customers who overdrafted their account by buying something small like a Starbucks latte.
These and other fees were extremely lucrative. According to financial services firm Sandler O'Neill, they made up 12% of Bank of America's revenue. On Tuesday, the bank took a $10.4 billion charge to its third-quarter earnings because the new regulations limit fees the bank can collect when retailers accept debit cards.
Checking Accounts Were Never Really Free
Bank of America CEO Brian Moynihan acknowledged in a conference call that overdraft fees were generating a lot of income. But the bank was also losing customers who were often taken aback by the high hidden fees.
Checking accounts were being closed at an annual rate of 18%, he said, and complaints were at an all-time high.
So Moynihan ended overdraft charges on small debit card transactions. He says the rate of account closings have since dropped 27%.
To make up for lost fees, he also started thinking of new products. In August, the bank introduced a new "eBanking" account, where customers were offered a free checking account if they banked online. The catch: If they opt for paper statements, or want access to tellers for basic transactions, they would be charged a monthly fee of $8.95.
"Customers never had free checking accounts," Bank of America spokeswoman Anne Pace said. "They always paid for it in other ways, sometimes with penalty fees."
Overdraft Fee Takes Another Form
This summer, Bank of America also started offering "emergency cash" for a $35 fee to customers who went to the ATM for withdrawals that would exceed their bank balance. Moynihan said 50% of these customers opted to go ahead with the fee.
"We are now in an era where consumers will be buying products from banks, even if it's a checking account," said Brian Riley, senior research director for bank card practice at consultant TowerGroup. He noted that several banks have started charging $7.50 for paper statements.
"Paper and print costs around $2.25, add postage to that, and if banks are losing income from other avenues, someone has to pay for it," said Riley.
Economic research firm Moebs Services says free checking usage has been steadily rising in recent years before falling this year. Last year 81.5% of U.S. banking customers had free checking, but that fell to 72.5% this year.
Large banks are also under additional pressure because of curbs from new laws on high-risk trades with complex derivatives. Their trading desks have been large revenue and profit generators for banks in recent years.
Michael Moebs, the founder of Moebs Services, said it is now up to the smaller Main Street banks to see an opening and grab customers from the big banks.
"Free checking could become a mainstay of community banks and credit unions in the future," Moebs said.