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Banks: The Final Death of Free Checking?


New bank regulation laws designed to protect consumers have left banks tasked with finding new ways to make money. And that's just what they're doing.

Some of the biggest banks in the world will remind consumers that every action indeed does have a reaction in 2011. In late July 2010, President Obama signed new bank regulation laws limiting when and how financial institutions can charge customers for services like overdraft transactions and ATM withdrawals. Ironically, these changes, which were designed to protect consumers from exorbitant fees, have left banks tasked with identifying new ways to make money. Based on the latest moves by some of the country's largest banks, it could mean the final death of free checking. Many analysts also warn that debit cards as we know them may soon face a similar fate.

In July, Wells Fargo (WFC) announced that it would no longer offer free checking, now charging new "Value Checking" customers $5 a month unless they make a $250 monthly deposit or maintain a minimum $1,500 balance in the account. Likewise, Fifth Third Bank (FITB) stopped offering any free checking options to new customers, unless a direct deposit or automatic savings plan feature is utilized.

And while meeting certain requirements to avoid fees is not necessarily new, the hurdles are certainly getting higher.

Beginning February 8, JPMorgan Chase (JPM) customers with a "Chase Checking" will need at least one direct deposit of $500 a month, or will need to make five debit card transactions per statement period, in order for the monthly service fee ($6) to be waived. The direct deposit amount was not stipulated previously.

Chase customers with grandfathered Washington Mutual accounts will be hit with even bigger fees as they transition into "Chase Total Checking." This account carries a $12 monthly service fee if the account lacks a monthly direct deposit of at least $500, has a monthly balance lower than $1,500, does not have a $5,000 average daily balance in other Chase deposit or investment accounts, or the customer has not paid at least $25 for other Chase checking-related services in the month.

The changes to direct deposit minimums will have the most impact on those who do not work traditional full-time jobs, and the unemployed. Social Security recipients will have direct deposit amounts exceeding the minimum, according to the Social Security Administration Primary Insurance Amount formula used to calculate benefit amounts.

Bank of America (BAC) began a test initiative in Massachusetts, Georgia, and Arizona in January 2011, paving the way for national roll-out by year end that will attach monthly fees ranging from $8.95 to $25 to existing checking accounts, based on the product.

To avoid the fees, customers must meet criteria like maintaining a stated balance or using a Bank of America credit card at least once a month.

Bank of America did launch a new free checking product in August -- but only if a customer banks solely online and uses the ATM for deposit and withdrawal transactions. Otherwise, the account carries an $8.95 monthly fee.

The banks maintain that the move is less about fees and more about moving from a product- to relationship-based industry, echoing a paradigm shift seen in the last several years, as many financial institutions offer customers better rates or discounts, in exchange for a deeper banking relationship.

In light of the changes, online consumer groups have mobilized, calling for a boycott of big banks. But, it's also important to note that plenty of major online banks like HSBC (HBC) and ING (ING), regional institutions, and credit unions offer checking accounts without all the hurdles big banks are moving toward. But whether other banks follow their lead eventually might really lie in the actions of the consumers (or whether they take any action at all). In October, Bankrate's 2010 checking study found that consumers spend up to $620 a year on fees that are completely avoidable, like overdraft and ATM use.

Are Debit Cards on Deck?

Don't expect that the fees will stop at deposit accounts. Thanks to proposals from the Federal Reserve under the Dodd-Frank Bill, banks will be limited to the amounts they require merchants to pay debit-card transactions. The proposed bill caps the maximum amount banks could fee merchants at a rate that is more than 70 percent lower than the current one. The regulations would come into effect by late July 2011.

Such a change will leave banks scrambling to find a way to recoup lost funds, and at the same time, slash profitability from debit cards as a product. According to a 2010 Federal Reserve payment study, customers in the US use debit cards more than any other form of non-cash payment. For consumers who have grown accustomed to using debit cards as a healthy balance between cash and credit, major changes to debit card use are likely not far off. Industry consultant Duncan McDonald estimated that because card issuers generally require at least six months to implement major systemic and process changes, banks could begin notifying customers of changes in the pipeline as early as spring 2011.
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