  Free Checking - Is it Really Free?
What is “free checking” really and why do banks offer it? What are you truly paying for and how can you take advantage of it?
Banks nationwide are saying, “Sign up with us today, and get a free checking account,” offering everything from free check-writing to low minimum balance requirements.
According to the 2004 Community Bank Competitiveness Survey, published in the American Bankers Association’s Banking Journal, nearly 61% of bankers surveyed indicated that they have noticed an increase in local competitors offering free checking accounts, a 40% increase since the 2003 survey. With the growing competition between banks for a greater share of consumers’ deposits, free checking accounts are not as scarce as they used to be.
The continual opening of new branches, industry consolidation and technological advances have made transferring accounts virtually hassle-free. Now, the switch takes place in hours rather than in days. As more and more consumers are attracted to this new crop of free checking offerings, they are left wondering: is free checking really free and why are banks offering free checking anyway?
What is Free Checking?
The Federal Truth in Savings Act requires that a "free account" have no minimum balance requirement and no maintenance or activity fees and that financial institutions disclose fees and various service options. A maintenance fee might be a monthly service charge while an activity fee could be a charge for writing more than a specified number of checks in a month. While there are restrictions on these types of fees, it doesn’t mean that there aren’t other fees.
“Many consumers think that when we say free checking we mean every service associated with managing their account is free. That’s simply not possible,” says Charlie Fry of Financial Savings & Loans.
Although they are offering free checking accounts and waving most service charges, banks still garner significant revenue from those accounts. Free checking doesn't entail banks waiving their increasingly NSF (non-sufficient funds) charges and ATM fees.
Fees associated with checking accounts
Most consumers are aware that there are certain fees associated with having a checking account, free or not free, such as non-sufficient funds charges, stop payments, check printing, dormancy and closing accounts early. However, there are some other fees that banking consumers are not aware of. Many banks, for example, include a debit card with free checking accounts and, in turn, charge their customers a fee every time they swipe their cards at a cash register. Fee-based overdraft protection is another popular service automatically included with free checking. In fact, according to the ABA survey, 40% of banks offer fee-based overdraft protection and 75% of those banks provide it automatically.
Why do banks offer free checking?
“Offering free checking is an excellent way for banks to attract new customers in order to sell them new products and services,” adds Fry. Once a bank signs you up for a checking account, the next step is to cross-sell, encouraging you to try other services including personal, car and mortgage loans, credit cards, insurance, wire transfers, investment services or even wealth management.
Bankers in the ABA survey were asked to speculate about why they were seeing an upsurge in free checking, the number one answer was “to generate a base for fee income”. These fees, such as non-sufficient-funds fees as high as $35 for overdrawing accounts by as little as $1, make up 35% to 45% of some banks’ annual revenue.
How to make free checking work for you
The moral of the story: Do your homework before you’re lured into the arms of a new banker!
Consider what your banking needs are: Will I be an ATM user? How many checks do I write each month? Do I want online bill payment? How often do I bounce checks? Do I use my ATM/debit card when making purchases at the grocer?
Also, when you apply for free checking, be sure to ask for a printed copy of the bank's fee schedule, and read all materials provided by your bank. Keep an eye out for favorable bank promotions as these institutions heat up the competition for your dollars. Always ask questions. Identify a bank representative at your financial institution, usually an accounts manager, and introduce yourself. Feel free to call them up whenever you are not clear or have questions regarding fees and your account. Do your research and come out on top!
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