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Free Checking Designed to Generate Fee Income

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FeesNearly three years ago, I talked about how free checking isn’t really free because you are earning 0% interest on your money there. Today, as I’m reading The Big Short by Michael Lewis, I reached a passage in which Lewis shares an anecdote at a lunch where Herb Sandler, the CEO of Golden West Financial Corporation shared his thoughts on “free checking.”

Sandler said he didn’t believe in free checking because “it was really a tax on poor people – in the form of fines for overdrawing their checking accounts. And that banks that used it were really just banking on being able to rip off poor people even more than they could if they charged them for their checks.”

We now know that new banking regulation make overdrafts opt-in. In 2009, overdraft fees generated $38 billion in revenue for banks, according to USA Today. That’s a lot of cash. In fact, some banks see over a quarter of their revenues come from service charges on accounts like free checking (and they’re talking about taking away free checking).

As an aside: Golden West Financial was the second largest savings and loan in the United States and was purchased by Wachovia for around $24.3 billion in May 2006. Golden West Financial had about $122 billion in option-ARMs, which many believe severely hurt Wachovia’s financial position. You may recall, Wells Fargo purchased Wachovia in late 2008 as it neared failure.

So, if you plan on taking advantage of free checking, be aware that banks see you as a way to generate fees. They say free, but they’re really thinking fee. :)

(Photo: pagedooley)

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24 Responses to “Free Checking Designed to Generate Fee Income”

  1. Right on the money Jim. I just got an e-mail from Chase today talking about the changes to the Overdraft Coverage for my debit card. I’m glad that laws are making it more difficult for banks to blind-side consumers from the fees are ridiculous!

    $34 dollars for overdraft coverage! Even worse I scrolled down to the bottom with the fine print and found some other great gems down there. If you make multiple transactions in a single day that require the coverage they will charge you up to 3 times. Worse yet, if you over draw 5 consecutive business days they’ll charge you an additional $15!

  2. There’s always a catch. When someone offers you something free, you should always be suspicious of their motives.

    • cdiver says:

      I am not sure that I agree with that. We were hesitant to offer a free checking product in fear of canibalizing or fee income.

  3. Kate says:

    I am so glad that about the new law. I recently got an overdraft charge and it was for something I cancelled and the charge never went through. Such a rip off.

  4. CreditShout says:

    They always find a way to make money, don’t they? Thanks for the insightful post.

  5. cdiver says:

    My community bank offers free checking because now a days you have to offer a free checking account.

    They chose to take the high road and just not charge overdraft fees for the certain transactions that are covered in the upcoming Regulation E.

  6. Yeah, it is pretty ridiculous what they charge on overdraft fees. I can’t believe that they generate such a large amount of money just off of that alone. I try to keep as little money as I can in my checking account just for the reason that they earn no interest.

  7. Joe says:

    Banks already see us as a way to generate revenues. They use the money we put in them for savings to invest and make money off of. They’re not providing a service out of the good of their hearts.

    • Joe, I see your point here that we’re giving them an interest free loan. But I see it as a you scratch my back and I’ll scratch yours kind of thing. For no charge they provide you with a standardized vehicle to do money transfers, checks, debit charges, check depositing etc, with the understand that they’ll try to make a little bit of money with your cash balance.

      But this to me is a whole different story. Instead they are actively trying to look for ways to zing the very people that are giving them an interest free loan!

    • billsnider says:

      Name me one company or goverment agency that does not see us as a revenue source.

      Bill Snider

  8. eric says:

    Well thank god I keep good track of my accounts then :)

  9. jay says:

    This is muddled thinking. Keeping a checking account balanced requires, at most, only the most basic of math skills. If you overdraw your account, you are VOLUNTEERING to pay exorbitant fees. Simply keep track of YOUR money and you don’t need to pay anything. It’s ridiculous to write/debit for more money than you have in your account and expect the bank to cover it with no fee. Why should they give anyone an interest-free, short-term loan that wasn’t even requested, but rather demanded when overdrafting the account? You’re not a victim when you volunteer for the punishment.

    BTW, banking is a business–of course they make money. That’s the point. They charge interest on loans and credit cards, et cetera. You control how much of your own money you give them.

    • cdiver says:

      It is alarming as to how many people can not or do not keep a balanced register.

      • cdiver says:

        It is no wonder why the country is in the condition it is. People are educated and encouraged to spend, not to save, not to invest, not to be financially responsible.

  10. HuBu says:

    Years ago, I had an overdraft protection charged to my credit card with BoA. It was charged to the card like a purchase. So no interest as long as I paid the amount off by the end of the month. Last month, due to bad judgment. I timed my transfers incorrectly and resulted in an overdraft on my checking. The protection kicked in and transferred money from the credit card to my checking. I was charged an overdraft protection fee (3%) of the amount moved over. I thought that was it. But it didn’t end there. I guess now, they consider this transfer a cash advance, so on top of the fee. I am paying interest on the amount too.

  11. Brian says:

    Ace and Jay are right… Good glory, another whining, crying, entitlement minded American outlook. No offense, but this is just selfishly silly.

    Here’s a thought, if you let me keep my money safe (yet accessible from any place worldwide) in your piggy bank, you can make interest off it. Fair deal so far, right? But when I come to use it, I demand the right to just take some extra out of your pocket as well. I’ll just pay you back when I feel like it and you’d better not complain or try to charge me any sort of fee for doing so. Would that be ok with you? :)

    Back to the real world, how fair is it of you to even expect services for nothing anyway? I’m thankful for free checking. I get to pay my bills online for free too, saving stamps and time. Name me another business that provides services for you at no charge. Banks are a for profit business, for crying out loud.

    Quit crying, spend your own money, and stop getting upset when you have to pay a fine for trying to spend someone else’s. Also, this article has nothing to do with “the poor” – in this particular case that’s just being used as a sympathy pulling title for those who spend more than what they make. Let’s grow up a little and take some responsibility.

  12. zapeta says:

    I’m proud of being one of these customers that doesn’t generate the banks a bunch of money. These fees are high but completely avoidable if you can do basic math.

  13. klaxx says:

    There certainly is some warped thinking going on here, especially with “Brian”.

    First, it is true that “free” checking is not free. The bank makes money several ways off of the deal: investing the depositor’s money, debit card transaction fees from merchants, and so on. Banks are not “providing services at no charge,” Brian. They’re just not charging the depositor, but they ARE charging someone. As for other businesses that provides services at no charge – how about TV, radio, and millions of websites, to name just a few? But they still get paid, just not by the viewer.

    Another thing is that even if you open an interest-bearing checking account and pay for checks, the account still has an overdraft fee. Getting rid of “free” checking accounts will not eliminate that fee.

    The big issue with overdrafts was that once upon a time the bank would not approve them. Then banks discovered that they could make a fortune by charging a huge fee and not allow customers to opt out. This policy especially hurt low income customers whose accounts come very close to zero balances every month. When you’re overwhelmed trying to balance everything, slip-ups are inevitable.

    Brian, your rant about customers demanding the right just to take some extra and pay them back whenever is a crock. These people you’re talking about have been trying to opt OUT for years – they have been demanding the right NOT to just take a little extra out.

    And don’t even get me started on how banks structure overdraft items to maximize fees. Or on how cash deposits that are supposed to be instant can be delayed for “processing” IF they suspect a transaction will come along that will generate an overdraft fee or fees. They don’t pay millions to analyze depositors’ behavior patterns for nothing, you know.

    • Jay says:

      >>>”Brian, your rant about customers demanding the right just to take some extra and pay them back whenever is a crock. These people you’re talking about have been trying to opt OUT for years – they have been demanding the right NOT to just take a little extra out.”<<<

      You're kidding, right? Don't take out more money than YOU have in your account and you have already opted out!!! Simple math. Keep track of YOUR OWN MONEY! How hard is that to understand. YOU are in total control of what dollar amounts YOU choose to debit or for which you write checks.

  14. Gone says:

    JAY!! Arguments for personal responsibility are SO 1950s! Get with it JAY!!!! We’re victims of the banks!! They are BAD!! In fact, all businesses are BAD!!! Government is good and so please give us more Government. I want to wake up and smell Government and go to bed and dream about heaps and heaps of Government. I want Government to tell me which side of the bed to lay on… Now back to Victimology class for you and this time for goodness sake try to pay attention!!!

  15. overdraft says:

    My bank charged me 3 overdraft fees in a row last month and wouldn’t reverse any of them. I recently got charged another 2 because of one small transacted. Once again, the bank wouldn’t reverse them. that is $175.00 in just overdraft fees within the past 1.5 months. I’m fed up and kind of want to get them back. I want to set my balance to exactly $100.00 and then withdraw 275.00. This would leave me with an overdrawn balance consisting of just fees that I’ve occured. Then I will close or not use the account anymore. What will happen? Since the overdrawn amount is fees that they charged will they send me to collections or check services or will it eventually be excused? Thanks

  16. Brian says:

    @overdraft While it may make you feel better initially, it will likely end up leaving you with the following: a mark on your credit, an inability to open an account elsewhere because of the mark on the credit, and future harrassing calls from collections agencies who will eventually buy the debt from the bank for pennies on the dollar. I would sympathize, but 5 overdrafts in a two month period kinda suggests that you might want to start paying your bills another way or at least start keeping better records. 1 penny over is still overdraft.

    I’m sure I’ll get dubbed ‘warped’ again for using common sense, logic, and suggesting that we take responsibility for our own accounting actions, but this whole discussion is akin to people getting mad at the city when they’re given a fine for speeding. Go the speed limit and it won’t be an issue. Spend only the money that you have in your account, and neither will overdraft fees be an issue. It will also save you from having to create self justififed ways to steal money back from those to whom you have willfully given it through negligence.

  17. Brian says:

    @Klaxx When someone tries to spend money that is not theirs, there will be a cost – of this you can rest assured. It’s simple economics. But let’s be honest, I could give a hoot about the semantics of whether it is “really free” or not. Feel free to argue that point with the wind, it’s not my issue. As long as I am not the one paying for it, it’s free to me, so folks can call it whatever they like. :) The cool thing is that I can continue to retain this benefit if I simply hold up my end of the bargain and only spend what is mine. The real issue being discussed here is the unwillingness of some to recognize that “free checking” only loses it’s “free” status for the user once either a lack of self control or poor accounting practices come into play, both of which will always have some sort of penalty attached to them regardless of any bank policy or fine print.


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