Inside Financial Services

Regulation Expands, And Free Checking Recedes

And it's the little guy who takes the hit

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As the Consumer Financial Protection Bureau continues to squander tens of millions of dollars on the monument it’s building to itself, the people the CFPB is most supposed to protect, unsophisticated consumers, keep getting the shaft thanks to the increased bank regulation that the CFPB exemplifies. Latest example: the decline of free checking. From yesterday’s Wall Street Journal:

More lenders are introducing fees on checking accounts just as consumers and businesses are pouring record amounts into the most basic of banking services. After regulators made it harder for banks to collect debit-card fees and new laws led to higher compliance costs, banks have been looking for different sources of income. Recent evidence suggests that one of them is the humble checking account, an entry-level services offered to most customers. Twelve years ago, the Journal reports, just a third of U.S. financial institution didn’t offer free checking. Now fully 41% don’t. The monthly maintenance fees banks have taken to charging aren’t cheap, either: they’re around $7 per month at several large banks. People like you and me can avoid these fees without much trouble. Banks tend to waive them for customers who have direct deposit or maintain a minimum balance. So the more well-off you are, the less likely you are to pay a monthly fee on your checking account. Instead, these fees (nearly $90 per year!) are being borne by the people who can least afford to pay them. Thanks again, Dodd-Frank! As the Journal points out, monthly service fees are making a comeback because banks are looking under every rock they can find for incremental revenues to pay for the higher compliance costs Dodd-Frank mandates and foregone revenues from things like the Durbin amendment. (Fed-promulgated ultra-low interest rates are curbing checking profitability, as well.) But banks’ efforts to scare up new checking revenues are only having so much success. Even though the industry has cut back on free checking and is boosting service charges and minimum-deposit requirements, industry consultant StrategyCorps estimates that 43% of checking accounts are unprofitable. Sensible financial regulation isn’t supposed to work this way. In a sane world, consumers would get the protection they need via well-thought-out, non-intrusive rules,and would also have access to the credit they want at a reasonable price. The recent financial “reforms” Congress has enacted do neither of these. For more affluent consumers, that’s not much of a problem. Instead, it’s less-sophisticated, lower-income consumers who are paying the price. What do you think? Let me know!

9 Responses to “Regulation Expands, And Free Checking Recedes”

  1. Ken

    Those who think big banks are total villains can believe Dodd-Frank had nothing to do with these new fees or higher compliance costs. These may be the same folks, who like Sandra Fluke, wanted free contraception and other “free” stuff.

    Then there are those who realize that there are no free lunches. If Fluke actually pays for insurance, she’ll notice that her free contraception is likely costing $3,500 more a year in premium. Likewise, some of the community bank and credit union CEOs I know – not the mega banks – are crying about the seven figure increases in compliance costs – including hiring more compliance people thanks to all this regulation.

    Regulators like the CFPB – all (what is it now) 1,500 of them (doing what?) think all they have to do is pass a new reg requiring somebody to stop charging something… and magically, the bank won’t need to replace that income.

    Let’s remember that banks have to make a certain minimum because they’re also regulated on the amount of reserves they have to keep. More reserves also leads to less profits when they are not put into lending… and further slows the economy. But, what the heck? The press can excoriate the banks for trying to maintain profits and reserves.. which regulators hammer them for if they don’t. Talk about being between a rock and a hard place.

    The OWS crowd may feel that they should pay Jamie a few million less, and all these fees can go away. But his salary won’t cover but a tiny percentage of it. Just like “taxing the rich” is not going to erase the national debt.

    I could go on, but I have work to do.

  2. Ole

    Yes, let’s let the banisters do their own thing without the gumming getting in the way.

  3. rivvir

    “monthly service fees are making a comeback because banks are looking under every rock they can find for incremental revenues to pay for the higher compliance costs…” Baloney! Banks are looking for everything they can find to get their profits. They’ll do whatever they think we’ll swallow. Maybe they’ll use the excuse of df for every little charge they put to us, but you can bet if there wasn’t a df it would’ve happened anyway, so please, it was just a matter of time, and df did nothing to hasten the day. What you should be looking for is where else can they stick it to the consumer, and warn us ahead of time.

  4. PureDaktoa

    Although entirely foreseeable, this will be written off as another unintended consequence.

  5. PureDaktoa

    Although entirely foreseeable, this will be written off as another unintended consequence.

  6. CAW

    Hard for me to believe that you actually care about the lowest consumer on the totem pole. I’ll feel sorry for the banks when Jaime Diamon stops making $20M a year while paying $B’s in fines and trading losses.

  7. DSB

    It is not just “people like you and me”, but also the people drafting the rules who can avoid the fees too. They are people with an idealized view of the world as they see it should be. It is easy to live with the rules when it doesn’t impact you and actually supports your continued employment – either inside government or in the private world as a result of your intimate knowledge of the rules you made up. Increased banking regulation has led to increased costs for staffing, employee education, compliance and reporting. Like most good fiduciaries the bankers are looking to grow revenues or minimize costs to compensate for the impact to their bottom line. The result is that the people who can most benefit from low cost bank products are being marginalized in the name of doing good on their behalf. It is not just free checking but the elimination of access to credit in many different forms, the latest of which is the shutting down of Deposit Advance services at banks.

    Thanks Tom for the post.

  8. Randall Grossman

    This one I have to disagree with you on, Tom. While Dodd-Frank is a deeply flawed piece of legislation, it is not the reason that monthly service fees are going up. Those fees are increasing because it has become clear that interest rates are not going to rise appreciably in the near future. The value of those funds on deposit is simply too low now (and will continue to be so) to subsidize the considerable expense of providing checking and other payment services.

    Monthly maintenance fees on ordinary checking accounts are less than $10. Is that really such a horrible charge for a product that provides such a wide range of payment options, options that are expanding all the time (e.g., online banking, remote deposit capture, etc.). What ever made us think that these services should be free?

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