The New York Times recently had an article on the pending demise of free checking (Free Checking Could Go the Way of Free Toasters, Jan 23). As the article notes, free-fee checking accounts had become the norm in recent years but that is likely to change this year:
The biggest impact on checking accounts, however, is likely to come from new regulations governing overdraft protection. Starting in July, banks will need explicit permission from customers before allowing them to use their debit cards to spend more than they have in their bank accounts on a one-time purchase. Similar restrictions will apply to A.T.M. withdrawals.
Banks earn billions in overdraft fees, money that helps pay for free checking. A chunk of that revenue will disappear when some consumers elect not to sign up for the opportunity to spend more than they have. This week, Bank of America said that $160 million in overdraft fee revenue had already disappeared, because of changes it made in its policies ahead of the new federal rules.
How do you get to a nine figure sum of overdraft fees? Consider this:
G. Michael Flores of the financial services consulting firm Bretton Woods estimates that the average customer paid 12 overdraft or other insufficient-fund charges in 2009, often at $25 or $30 per transgression.
That is, free checking accounts owe their existence to bookkeeping challenged chumps.
I am teaching service ops this term and this article got me thinking about one of my favorite readings for the course, Frances Frei’s article “The Four Things a Service Business Must Get Right” (HBR, Apr 2008). One of those four things is the funding mechanism. That sounds curious. Why isn’t this just a pricing problem? The issue is that with many services the “price” can be a little clouded and what the customer gets for what she pays is also ambiguous. To see the point (which is also articulated by Frei in some of her articles), think about your car. Whoever made it can’t control what you do with it, which is fine since what you do doesn’t generally cost them anything. Now think about your bank. The bank may get paid for providing your checking account through a monthly fee or by paying you an insulting low interest rate. Like the car company they cannot completely control what you do. But now that costs them something. If you come in every day to deposit $134 in loose coins, you are probably getting more than you paid for.
So is it bad that free checking is going away? On the whole, I think not. I’d prefer that my account not be subsidized by taking advantage of the clueless. That said, it also seems reasonable that the bank imposes fees to discipline the careless. The question I have is what does it cost to offer a checking account? I realize that prices are not necessarily tied to the cost of production. However, an FDIC insured checking account is basically a commodity so it should trade pretty close to cost. If we go back to a world of fees and minimum deposits (although the NYT article discusses why that may not happen), how much should I expect to pay for a checking account? I don’t think it should be that much. The economics of banking seem to have changed significantly over the last ten years or so. There is essentially no regular bill I pay by check. If I can’t bill it directly to a credit card, I pay over the web. That has got to be a lot cheaper than processing checks. Maybe I don’t deserve a free checking account but I think I should get one for next to nothing.