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Community banks will still offer free checking, and here's why

March 8th, 2011 |

money-checks.jpgAt the biggest banks in the country, free checking is becoming a little less free.

  • Pittsburg-based PNC Bank, the fifth largest bank in the country by deposits, was the latest to whittle away its free checking account last week. Customers will no longer get reimbursed for out-of-network ATM fees if they don’t maintain at least a $2,000 average daily balance and they won’t rack up points for rewards on a PNC Visa credit card. But PNC Bank has decided to keep free checking, for now.
  • Bank of America hasn’t had no-strings attached free checking in years, according to a spokesman for the bank.
  • Wells Fargo & Co. did away with it in July of 2010. After acquiring Wachovia in 2008, Wells Fargo has been getting rid of free checking for Wachovia on a state-by-state basis as it consolidates the two banking organizations.
  •  Citigroup doesn’t have free checking for new customers, either.

With Congress regulating away tens of billions in fee income from banks in the last couple of years, including a rule that will slash large bank interchange income on debit cards by as much as 85 percent, banks are looking to do away with unprofitable deposit accounts.

Mike Moebs, an independent researcher who tracks account activity for bank clients and federal organizations such as the U.S. Government Accountability Office and the Federal Reserve Bank of Chicago, says the move away from no strings-attached free checking at big banks is opening up a lucrative way for community banks to steal customers from the big Wall Street and regional banks.

Most of the nation’s smaller banks and credit unions still have free checking, he says. They have smaller operating costs than big banks, so they can afford to keep offering it, he says. The average cost of a checking account is about $200 to $250 annually for a community bank, Moebs estimates. That’s compared to a cost of about $350 to $400 for a big bank, which has more branches, more employees and tends to operate less efficiently, he says.

Moebs estimates banks with more than $50 billion in assets controlled 45 percent of all checking accounts as of 2009, but that will drop to 35 percent by the end of this year, he says. That’s a loss of about 13 million checking accounts that will migrate to smaller banks and credit unions, he says.

Some credit unions have even added free checking to take advantage of that switch, Moebs says, going from 75 percent of all credit unions offering free checking in July of last year to 84 percent last month.

Banks with fewer than $50 billion in assets stayed about the same since July, with 62 percent of them offering free checking. Only about half of big banks had free checking last month, down from 64 percent last July.

Moebs said smaller banks can make free checking pay by selling other products such as automobile loans or mortgages. They also can attract small business owners, an important clientele for community banks, using the free personal checking account to nab their loan business.

While community banks may end up stealing some customers from big banks with free checking, the convenience of branch banking still will be a significant hurdle to overcome. A recent survey by J.D. Power and Associates found that advertising and branch convenience remain top concerns for customers looking for a new bank, and fees play a less important role.

Plus, big banks may succeed in holding onto the vast majority of deposits, even as they lose account holders who kept small amounts of cash in the bank.

Free checking may help community banks steal some customers. But it won’t make them profitable. That’s up to the bank.

nsnyder

Naomi Snyder is the managing editor for Bank Director, an information resource for directors and officers of financial companies. You can follow her on Twitter at twitter.com/naomisnyder or get connected on LinkedIn.

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