I am curious as to how Banks make money offering free checking accounts. (Referring to free checking where there is no minimum to maintain nor direct deposit requirements)
So whats the catch?
I can’t tell you how many banks, but mine (BankOne formerly NBD) gives free checking with a direct deposit agreement. Strictly speaking it’s not free checking, but you have a “fee waiver” for having direct deposit. Since paychecks are stupid, it works well.
Oh, the “stupid” part is editorilizing, but the rest is pure fact. 
This has amazed me since coming to the states. In the UK, they do not charge you to have a regular account at all. In fact, they actually pay you a rate of interest on the money that you keep in your regular account. They make money because they obviously don’t give you the same rate of interest that they make themselves on your money.
In the UK, charges for using another bank’s ATM were eradicated (under government pressure) a few years back. The banks had argued that they needed to charge fees because they had to maintain the ATMs etc. Then somebody figured out that it only cost about 0.1p per transaction to cover the costs of all the ATMs. They were charging anywhere between £0.50 and £1.00.
The point is that US banks (unlike many other services) are stuck in a time warp from the 70s/80s where they could get away with charging people for extremely poor service. It seems to be counter-intuitive in a country that thrives on competition. My question is ‘How come it has taken so long for banks to compete on charges in a country that is the embodiement of capitalism?’. I wish it would hurry up too. One day I hope I won’t get charged $2 from the bank that I am withdrawing cash from AND $2 more by my own bank for using someone else’s machine. I hate Wells Fargo.
They probably don’t. It may be a loss leader, thinking other accounts and services will be opened that they can make money on.
If a bank were processing 100,000 checks already, the marginal cost of processing a few hundred more is possibly smaller than the cost of advertising to bring in additional customers.
With direct deposit, they get to use your money from the instant (usually overnight) that it hits, before you can access it.
It may be counter-intuitive, but it still makes sense (and cents). Since they all do it, they all get richer by 1) charging you more money, and 2) hiring sub-standard help.
** quicken78 ** , Wells Fargo charges you to withdraw money from their ATM’s? I have a free Wells Fargo checking account, and I only get hit with extra charges when using another bank’s ATM, and then only the other banks charges, Wells Fargo doesn’t charge me anything.
Actually, quicken78, in my experience, a lot of banks offer many free accounts. Savings accounts are generally the ones that generate interest, as the money is designed to be put there and not really taken out a lot, unlike a checking account. I have also never had a checking account charge me anything, other than a different bank ATM fee. (I would say they charge me for checks, but I have never wrote any, always use my debit card, God I love that thing.)
Usually the accounts that do charge money are ones that are designed to handle so much money that the interest you make on it more that pays for the account itself. It’s kinda like a way of telling people not to use high-interest accounts unless theyreally have a reason to.
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Banks probably use the money in the checking account to generate interest. Most free-checking accounts (all that I’ve seen) have a minimum balance that you have to keep the account at before they charge you.
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As mentioned already, it’s a good loss-leader. Customers tend to be loyal in the banking business. I have a free checking account at a bank, and if I ever need to get a loan or CD then I’ll go there first.
aeropl, my BankOne account doesn’t require any minimum (but does required direct deposit). As for loyalty, yeah, you’re right. I haven’t thought of going anyplace else for any other financial services, other than my primary mortgage!
People don’t remember in the old days banks didn’t charge. In the 70s I had a savings account with five dollars AND got paid 5% interest on it. Banks make money. They make money on virtually everything. But the found out a long time ago if they all did people would have to pay.
It is like charging for non published phone numbers. In the old days when 411 was free, it made sense. They had to manually scoop your number out and then the increase in calls to 411, if you number wasn’t in was a concern. But today a computer can knock out numbers as easily as put them in. And 411 costs.
Of course Telcoms say most people WANT their number in. I would bet if you offered free opt out everyone would opt out. Besides if that was the case they would CHARGE to put it in as, if what they say is true, people want it and they would make money.
So banks charge because they CAN. I work at a Michigan Ave hotel in Chicago. Our cost to break even on a room is $34.00. The ave rate is about $199.00. Well I guess if our GM makes $200,000 a year someone must pay.
Worth checking out, if you can live with the restrictions, is Presidential Bank. If you set up a direct deposit, and keep a minimum balance of $1000, you get free checking, 3% interest (it was up to 6% a couple of years ago), free online billpayer service, and no ATM fees.
The downsides are that they have only a handful of ATMs of their own (in the DC/MD/VA area), and only a few “bricks and mortar” branches (ditto on the location). So, if you’re not close to one of their branches, non-direct deposits have to be mailed in, and there’s no way to deposit cash (give the cash to a friend, have him write you a check, and mail the check in to deposit it - then again, I can’t remember the last time I actually had cash to deposit). And you’ll have to pay whatever ATM fee is charged by the bank that owns the ATM you use (i.e., Presidential doesn’t charge a fee, but the ATM owner probably will).
The interest rate and freebies make it worthwhile to live with the restrictions, and if you live close to one of their branches (like I do), it’s a no-brainer.
I would bet you that “free checking” is not a loss leader at all. First off, the banks get to use your money without paying you interest.
But what I bet makes the lion’s share of their profits are the other fees they charge. In particular bounced check fees have grown to outrageous levels nowadays. When you bounce a check, banks will charge you anywhere from $15 to $35 dollars! I’m sure they get enough customers who bounce checks to more than make up for what it costs them to offer “free checking”
I disagree. Let’s take someone who, over the course of a year, averages about $200 in the account at any given time. True, the bank does get to use that money, but there’s not much they can do with it. Suppose they’ve lent it out on an 8% mortgage. That’s $16 the bank earns on this guy’s money, over an entire year. Think that will cover all his checks and deposits? If they’re all electronic, maybe. But if he uses tellers (as I do for all deposits except paychecks) the bank will lose money fast.
But people with such low balances will be very likely to have occasional – or frequent – overdrafts. And at $30 each, these accounts are major profit centers for the bank.
Or so I imagine.