LAKE FOREST, Ill—Free checking offerings fell in 2015 to 59.3% of all financial institutions, down from a high of 81.5% in 2009, according to a new analysis that suggests the trend is driven by differences in how banks and credit unions view consumers.
The decline represents a drop of 27.2%.
The report from Moebs $ervices also shows that while free checking dropped from about 80% of CUs in 2014 to 73.6% at the close of last year, the gap between the percentage of CUs and banks offering free checking remains significant.
Michael Moebs, economist and CEO at Moebs Services, said the chasm exists because credit unions believe their members want free stand-alone checking, while most banks are moving away from free checking to relationship pricing. Today, only 46.0% of banks offer free checking, the report indicates.
“There is a noticeable difference in how credit unions and banks view the consumer,” said Moebs, whose report surveyed 2,791 banks and credit unions in December.
Competition Is Good
Moebs said the competition appears to be a good thing for the consumer. He noted that banks often do not charge for checking if the consumer has other services.
"Most credit unions don’t focus on cross-selling like the banks do and see the consumer getting a ‘stand-alone’ free checking account as their best deal,” Mobs said. “These different approaches are the foundation of the differing strategies between banks and credit unions.”
Looking back on the history of free checking, Moebs said the product first started after World War II when bankers wanted the returning GIs’ business.
“In the late 1950s computers came to banks. By the 1960s, using information processed by the computer, the Suburban Bank in the Chicago area and their chairman, Gerald Fitzgerald, first linked overdrafts to free checking,” observed Moebs. “Truth-in-Savings in 1993 gave free checking a definition. Times were good in the 1990s with free checking offered by one-third of banks and credit unions and up to over 80% in the 2000s. Then in 2010 came the Dodd-Frank Act and the start of the Consumer Financial Protection Bureau. Rising compliance concerns and substantial increases in transaction account volume and related cost precipitated the decline of free offers.”
Michael Moebs, Moebs $ervices
According to Moebs studies, over 94% of checking accounts today are not profitable.
Generating business and revenue are at the heart of the free checking offer, said Moebs.
“Checking is the key to the relationship coveted especially by banks today,” he said. “Opening a free transaction account is like getting a free name and address list to promote other services.”
Recession Lessons
The Great Recession in 2008 started many FIs questioning the profitability of free checking, continued Moebs.
“The FDIC issued ‘guidelines’ on overdrafts that were enforced by its examiners,” said Moebs. “The CFPB views and FDIC position on ODs convinced banks to move away from free to avoid compliance issues that added cost to already expensive transaction accounts because of rising volumes. Credit unions took issue with cost and overall profitability concerns, and still strongly feel free checking is almost a part of a consumer’s bill of rights.”
Ultimately, the decision to offer or not offer free checking will be driven by direct cost, indirect cost and overhead for the transaction account business, concluded Moebs.
“If an FI has low operating costs, free checking can be a very worthwhile service with or without other service relationships,” Moebs said. “But having moderate to high cost to operating a transaction account then makes free something to avoid and achieve basic checking relationships with other forms of pricing.”