(May 13) — Imagine having a checking account that only shrinks when you spend money. Unfortunately for most banking customers, that’s becoming a pipe dream. Today, too many “free” checking accounts come with maintenance fees, monthly fees, overdraft fees and other unusual fees that steadily eat into account balances — even if the account holder doesn’t spend a dime.
And more fees are on the way. In fact, don’t be surprised if the term “free” soon becomes synonymous with “hidden fees” when it comes to banking.
That might sound strange coming from a banker and given that the federal government just issued new regulations to clamp down on exploitative overdraft charges. But some banks are already devising new and creative ways to make up that lost revenue. And their first target will be your checking account.
Starting in July, banks will no longer be allowed to automatically enroll customers in overdraft “protection” programs — and thus slap them with hidden fees when they overdraw their accounts. Instead, banks will be forced to obtain customers’ permission (opt-in) before allowing them to overcharge their debit card.
This is a big win for consumers. Last year, banks throughout America collected over $105 million in fees every day because customers overdrew their checking accounts.
Here’s how overdraft fees currently work: Imagine that you pay all your monthly bills online on Monday. Three days later, the cable, phone and electric companies all withdraw the money from your account — but your twice-monthly paycheck hasn’t posted yet. So when you pay for a $7 lunch with a debit card, you accidentally overdraw your account.
Most banks levy a hefty fee for covering this sort of mistake. For a typical customer, that $7 lunch would wind up costing $37 ($30 fee + $7 lunch). That’s not very convenient — or very fair.
Some banks are aware of the consumer backlash they may face because of their overdraft policies. One recently announced that it will pay heed to the new rules before the July deadline by scrapping overdraft penalties and replacing them with an opt-in “overdraft protection” program. Customers will have the option of linking their checking account to another account to transfer money in the event of an overdraft. Unsurprisingly, this service still comes with a fee.
Other banks offer an overdraft line of credit instead of a hefty fee. Customers who go into the red are charged a competitive interest rate on the amount they overdraw. At my bank’s current rate, for example, an overdraft line of credit of $100 would only cost a customer 2 cents a day. With the overdraft line of credit, an account holder has a low-cost way to learn to spend responsibly, and can still access funds in an emergency. And, yes, we’ve always required customers to opt-in to overdraft.
Of course, overdraft lines of credit aren’t as profitable as the old flat fees. So other banks are already looking for new ways to replace their fee income.
One big bank recently announced that it will levy a $7.50 monthly maintenance fee on many checking accounts unless a customer maintains a minimum account balance of $1,500. Previously, this bank waived the fee if a customer had direct deposit or made at least two automatic bill payments a month.
Among banks that already charge their customers for just having a checking account, the average fee is $6.63 a month. That’s up 15 percent since 2008. While $6.63 per month might not sound like much, that adds up to about $80 over the course of a year. For an account with an average balance of $500, that’s equivalent to a 16 percent annual service charge.
Don’t expect banks to tell you about any of these charges in their marketing campaigns.
Banks seem to think they can increase checking fees without losing customers. In a sense, they are gambling on customers believing that changing banks is too complicated and time consuming. But that confidence may be misplaced. Americans today have more choices than ever before, and it’s now incredibly easy to switch bank accounts.
By putting in just a few minutes to move over to a low-cost bank, customers can save hundreds of dollars a year in fees. And, after all, shouldn’t banking be about making it easier to save money, not spend it?
Arkadi Kuhlmann is president and CEO of ING Direct USA.
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