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Free Checking Designed to Generate Fee Income

Posted By Jim On 06/17/2010 @ 2:01 pm In Banking | 24 Comments

Nearly three years ago, I talked about how free checking isn’t really free [3] because you are earning 0% interest on your money there. Today, as I’m reading The Big Short by Michael Lewis [4], 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 [5]. That’s a lot of cash. In fact, some banks [6] 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 [7])


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/free-checking-designed-to-generate-fee-income.html

[3] free checking isn’t really free: http://www.bargaineering.com/articles/free-checking-isnt-really-free.html

[4] The Big Short by Michael Lewis: http://www.bargaineering.com/articles/r/amazon.php?asin=0393072231

[5] USA Today: http://www.usatoday.com/money/industries/banking/2010-03-04-overdraftfees04_ST_N.htm

[6] some banks: http://online.wsj.com/article/SB10001424052748703513604575311093932315142.html?mod=rss_Today

[7] pagedooley: http://www.flickr.com/photos/pagedooley/3302646512/sizes/m/

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