Bank customers used to the perks of free checking accounts -- unlimited check writing, online banking, debit card use and ATM access, to name a few -- might have to recalibrate their expectations soon. That's because overdraft fees, which banks use to subsidize the expense of free checking accounts, have been under fire by consumer advocacy groups. (A quick primer: You spend $8 on lunch at Burger King and pay with your debit card. But there's only $5 in your checking account. The transaction is still approved, but the bank slaps you with a hefty overdraft fee for the privilege.)
There have already been some changes to the way banks must disclose overdraft fees on statements, but now there's a bigger push to require institutions to obtain accountholders' permission before charging them overdraft fees on debit card purchases and ATM withdrawals. President Obama's proposed Consumer Financial Protection Agency would likely address overdraft fees in some way.
That spells trouble for banks already hurting from the financial crisis. The bulk of revenue in bank retail deposits comes from penalty fees; economic research firm Moebs Services estimates that banks will rake in a total of $38.5 billion in overdraft revenue this year. In fact, a 2008 FDIC study concludes that 74% of all service charges on deposit accounts come from overdraft and insufficient fund fees, which typically range between $35 to $40 per incident. But there's a small amount of consumers who shoulder most of the fee load: According to a May report from consulting firm Oliver Wyman, 68% of those fees come from just 5% of banking customers (who pay, on average, $1,614 each year). Meanwhile, 74% of customers pay no overdraft fees at all.
But with banks expecting roadblacks to fee income, some experts predict that the free-checking model might be on its way out. Aaron Fine, author of the Oliver Wyman report, recently told banking industry trade publication American Banker, "The industry has to change pretty dramatically because a substantial amount of the revenue that paid for free checking is likely to go away. That business model is not sustainable."
For now, there are still plenty of free checking options out there, and many experts expect them to remain in some format so that banks can compete for customers. But Probity Financial Services, a small company based in Austin, Texas, partnered with Missouri's Kennet National Bank in April to offer an alternative to those consumers who are tired of paying hundreds of dollars in overdraft fees each year. For $19.95 a month, you can set up a Probity online checking account that never charges overdraft fees, transaction fees, minimum balance fees and offers free online bill pay and ATM/debit card usage.
"We're like Netflix for your checking account -- you pay a fixed monthly fee and use it all you want," says Probity CEO Tim Smith.
For those consumers who spend more than $240 a year on overdraft fees, Probity's checking account is a good solution. Each customer is assigned an overdraft limit (no more than $500) based on credit and banking history. If the customer makes a purchase for more than what's in his account, Probity covers the excess. To keep the account in good standing, the customer must deposit funds into the account within 60 days, or it will be closed. "The lion's share of accountholders do bring the account into positive balance," says Smith. He adds that most customers use direct deposit and typically just need the protection until the next paycheck comes in.
Still, $240 a year to avoid overdraft fees? Unless you're one of those 5% of customers who spend more than $1,500 each year on those fees, there are still plenty of cheaper options to prevent overdraft pain. (And if you are one of those 5%, can you let me know how the heck that happened?) Many banks allow you to link your checking account to your savings account to cover overdrafts. And there are plenty of ways now to keep tabs on your account balances with email and text alerts. Free checking may be teetering, but it's not going to vanish overnight.