Last week, I had the chance to chat with my anonymous banker friend, and he gave me permission to pass along some very interesting information. Here are his thoughts:
Some banks have stopped offering free checking. But why? Is this just a matter of the banks getting greedy and looking for ways to stick it to their customers? Are they trying to make up for money lost from loans gone bad?
No. There are many factors, but I’ll try to keep it fairly simple.
First of all, banks are in business to make money. Shocking, I know! Even though they are heavily regulated by the government, they are still businesses that are looking to be profitable. Two of the primary ways they make money are from fees, and income generated from people using debit cards.
Both of these are changing due to government regulations.
Last year, a new law was passed called Regulation E. In the past, when you set up an account with a bank, if you ever spent more than you had, you would get charged an overdraft fee. Regulation E changed that, meaning, when you set up an account now, if you try to use your debit card and you don’t have enough money, the card will be declined. That is the default, or automatic, way it’s set up. Customers can choose to “opt out” of this, meaning that they give permission to let the bank charge them if they overspend.
Why would you want to do that? Well, I call it the “flat tire” situation: you get a flat tire, you’re out of town, you only have your debit card, but you don’t have enough money in your account, but you really need a new tire. You’re willing to pay the overdraft fee because you need the new tire.
So, with this Regulation E change, the banks are not generating the same fee income from overdrafts, so they have to make the money up elsewhere. Or to turn it around, they could offer free accounts because of the income made from these overdraft fees.
Now before we get all upset at the banks or government, consider this: it isn’t the banks job to keep you from spending more money than you have. You are responsible for your own finances. But since so many people weren’t paying attention, the government felt like they needed to step in and do something about it.
As for debit cards themselves, banks would make money each time you used the card. Again, more government regulations are going to change that. The first thing that will go is any free rewards programs offered on debit cards. This hasn’t fully changed yet, but what else can you possibly see? Banks charging a fee if you use a debit card–most likely a monthly set fee. Also, you may see merchants demanding you can only use your debit card for purchases over a certain amount.
Many of the bigger banks have made the already switch. “Free checking” is now called “Essential” or “Everyday” or “Basic” or some variation of that. There are now minimum balance requirements for even the most basic of accounts, though sometimes these can be waived if you have direct deposit.
So what should you do? Write a nasty letter to your bank for charging fees? Blame the government? Put all your money in your mattress? (Side note story on this: when the big issues in 2008 happened, I had a customer come and pull out a large amount of cash from the bank. He then declared in a loud voice to everyone that money was no longer safe in the bank and he was going to put it in his mattress. Without missing a beat, another customer asked, “Yeah? Where do you live?”)
I’d recommend that you go in and sit with a banker to find out what the options are and ways you can avoid fees. Banks want to keep their customers, but they also need to make money. Shop around to different banks if you have the time. If one bank bad mouths another bank, that’s a warning sign. If the banker blames the government, that’s another warning sign.
But if by chance the banker sits and talks with you to find out how you like to bank and what are the best options for you, I’d strongly suggest you listen to them.
Thank you, anonymous banker friend! We appreciate it.
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