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BirdsEye View

free checking

SCB Forums members discussed the departure of Free Checking from the banking scene last March at our retail and Marketing meetings. The attack of NSF/OD fees has become so fierce that these fees were unlikely to survive regulatory scrutiny.

Ten years ago, when some banks (and consultants) began "pushing" free checking, the hue and cry was as loud as can be. Banks were deeply concerned about losing the meaningful income of monthly fees associated with their checking accounts. Well, here we are, ten years later, having the same concerns about NSF/OD fees These fees, that appeared to be the gift that keeps on giving, became the prime fee income driver of well over 60% of our industry in this past decade. Ever since the introduction of these fees, coupled with the clever "overdraft protection", banks and their vendors have been busy finding ways to "optimize the matrix", i.e. make more money off these fees. Elements such as check presentment order, inclusion of electronic items and their presentment order, and other creative fees, were introduced over the decade. The Fed said it focused on ATM and debit card transactions because they have been "a key driver behind the growth in the volume and cost of overdraft fees" (41% of NSF transactions). Finally, consumers and regulators both bulked, which is, in part, why we're in the soup with respect to these fees and, consequently, free checking.

Before you send me the email explaining why "high to low" is the best service for customers, please know that I understand the validity of the argument. Similarly, I have had many calls from customers thanking our bank for the courtesy overdraft which protected their credit standing and saved them meaningful amounts in merchant late fees. And yet, we overdid it&

The New York Times, a source of much aggravation for me (why do I keep on reading it???), had an interesting article Saturday January 23rd on the subject. As usual, the slant of the article was how evil banks taught consumers to become irresponsible with their money. That didn't bother me too much; it's par for the course. What got to me was a statistic the article quoted, which, while may be 100% accurate, is so very misleading. It said, quoting a consultant: "The average customer paid 12 overdrafts or other insufficient funds charges in 2009". That's when I felt compelled, again, to sit at the computer and bang out an article.

Free Checking coupled with overdraft protection is a product that is highly valued by a small but important segment of customers who prefer to use overdrafts as a way of life. They know it's uneconomical, as some pay up to $20K in OD fees, yet they persist, for reasons of their own, in availing themselves of the service. These customers, some of whom have been counseled by their banks in better financial management, still opt for the overdraft protection lifestyle. They are typically less than 2% of our customers, and often contributed over 85% of the OD fees. These consumers do not find the product onerous. They find it useful, and they vote with their insufficient funds notices time and time again. The New York Times did not mention this segment.

I agree that Free Checking as we know it today will disappear. I believe we'll go back to the good old days, with monthly checking fees and value packages (the Happy Meals I like so well). This will have a temporary impact on bank service charges, which will take time to shift from NSF/OD to monthly fees. At the same time, Free Checking with strings (e.g.direct deposit) will persist, and the free checking with lots of strings product (high rate with many conditions, e.g. 12 debit card transactions per month) will grow. Alternatively, stripped down free checking (e.g. no teller access) might be a solution for some. Additional innovation is also to be expected. Options such as expanded reward programs and debit card reward points are under consideration as we speak.

At the same time, I also believe that there will be a small but highly profitable pool of customers who will gladly opt in and will continue using the overdraft protection feature, thereby continuing the income stream they provide the bank while living the way they choose to live. Most of us in banking can't see this happening because we are in the business and we can't believe that anyone can be so financially cavalier. The fact is, some people are. Others are reckless enough not to optimize the interest on their deposits by leaving large balances in their non-interest bearing checking account. It just makes them feel good, to have that amount on hand.

The message in this article is simple: the industry will find a way to replace this fee income stream with another, as the Times predicts. At the same time, irrational financial behavior is a privilege that any citizen can exercise if they so desire, and some will. Ensuring that your bank has the product breadth to meet the broad range of customer needs is the first order of business. The second: giving customers what they want (with full explanation of the alternatives) without assuming that we always know better what's best for them.