I just received a new box of checks today from my financial institution and it was completely free. The account was recently opened though so it’s nothing to get too excited about (since initial boxes of checks are usually free), but I was still happy to see it during a time when so many banks are starting to charge for EVERYTHING from high monthly maintenance fees to an extra charge for paper statements. For example, I received a notice from a bank a few months ago that wanted to charge me a $12 monthly maintenance fee for the privilege of owning an account there. Are they kidding?
I have a few other accounts at different institutions that I immediately switched to, but I also shopped around to see the different offers available. I was surprised to see that most major banks are charging $5 dollars per month or more in maintenance fees unless I was able to meet certain criteria. These same banks did offer free checking IF I made direct deposits of $500 or more per month or maintained a balance of $1,500 or greater. For those who may not be aware, the money in a personal checking account isn’t just sitting there waiting to be used. It’s being lent out to other people and institutions so the bank can generate a revenue stream. Of course, they have to maintain a portion of all funds on deposit in reserve (usually 15% cash) just in case someone wants to buy groceries or a new flat panel TV, but the bulk of all cash on deposit at a bank isn’t really there at all. What would happen if everyone with a checking account asked for all of their money back at the same time? Watch the movie ‘It’s a Wonderful Life’ (one of my personal favorites) and the process will become a little clearer. My big question is that if the banks are generating revenue off of my money already, why do they need even more by charging me a monthly maintenance fee?
Several years ago during the mortgage meltdown debacle, banks would more or less lend money to anyone who could fog a mirror. Low credit, no credit, no problem! Well, not until default rates went through the roof anyway. Many banks crumbled in the aftermath, and many more are still suffering the woes of their bad investments to this day. The only solution to their problems is to gain more revenue. How are they going to do that? From you and me of course! Banks make the bulk of their income by lending out our money to other people. If that money isn’t in our accounts, their revenue stream falls. To ‘encourage’ our monetary participation in their grand scheme for greater profits, banks are creating penalties as a sort of consolation prize. If there isn’t enough money to lend out from a small account, at least they can still generate SOME income from us in the form of monthly fees. If we play the game according to their rules and gain a favored status by meeting certain qualifications, then free checking shall be our reward. The bank will make far more money off of lending out our money than off of monthly fees, so it behooves the bank to offer minimum balance and direct deposit incentives to waive monthly fees and gain more revenue.
In addition to greater revenue, banks also receive an additional benefit when we comply with their balance demands in the form of a more predictable pattern of revenue generation. Banks love to anticipate future growth and earnings based on current and proposed actions. What better way to see the road ahead than to plot its course? If our accounts do not meet the special criteria for favored status, then they can anticipate revenue off of monthly maintenance fees. This represents the floor rate of earnings assuming a specific percentage churn in account turnover. What if we meet the minimum qualifications? Then their revenue skyrockets and earnings can be anticipated based on average daily balances of their depositors and subsequent lending of those funds at a given rate of return. Either way, revenue increases and becomes more predictable. It’s a win-win situation for the banks.
So what can we do about these fees and minimum criteria? There are still many banks and credit unions that offer truly free checking. I take advantage of these services (note the new institution I mentioned at the beginning of this article) and you can too. A good place to start is www.bankrate.com. I’ve used this website for years to compare rates and find financial institutions that I’ve never even heard of before. All financial institutions will lend out our money, but we don’t have to let them charge us to do it. Follow the rules they offer for free checking or find a bank that offers truly free checking and we can avoid those unnecessary monthly fees. Either way we choose to avoid them, the monthly savings by avoiding those fees can be placed in an interest bearing account to save for future retirement to make us richer instead of the bank. I know, interest rates on savings today are terrible, but it’s better than nothing for the moment. I’m sure I’ll have more to say on that subject at a later time.
Your assignment: see how many financial institutions you can find that offer TRULY free checking and post them here.
Bonus points: describe, in general, the relationship between banks and the Federal Reserve.