This is a guest post brought to you by The Digerati Life, a site which covers a wide variety of financial topics from the best credit cards for rewards spending to the top online stock brokers around. This post covers bank fees and the the end of free checking.
Working for a bank during one of the most devastating recessions to hit the United States in history has given me a unique perspective when it comes to understanding how banks work. Of course, it doesn’t help that banks took some of the biggest hits during this recession, but I was actually watching a story on CNN the other day that actually got my wheels turning about where this economy just might be headed.
Banks have been around for years. They take your money in the form of deposits and record that cash somewhere in their log books and then lend your cash to each other in order to make a quick buck in interest. These loans to each other are what keep banks liquid and profitable. They do this because historically, banks don’t make a whole bunch of money from the bulk of their customers. The bulk of bank customers belong to a group of folks known as depositary customers. These are the folks you get behind in line that deposit their checks into their checking and savings accounts each week and don’t really do much else.
Banks make a few bucks off these guys in the form of fees. For instance, do you remember a few years back, before free checking was the norm, you used to have to pay a monthly fee in order to have a checking account? Not only that, but you might have also had to pay a fee to write over a certain number of checks, to take out money from the ATM and pretty much every other service you can think of. This is because it costs the bank money to hold an account in your name. If they didn’t charge you for your account, not only did they lose the opportunity to make money, but they actually lost a few bucks a month in the process.
Nowadays, fees for bank accounts were the norm, but as competition for bank customers increased (in order to increase market share based on the amount of total deposits a bank can claim), fees for banking customers decreased in order to make one checking account look more attractive than another. Pretty soon, banks began offering free checking accounts. Bank accounts are never totally free, as most folks know that you can expect to pay fees corresponding to overdrafting your account, foreign ATM fees, etc., but monthly fees and a few other fees were eliminated.
Even with no fee savings accounts like SmartyPig and HSBC Advance that still abound, the landscape has since changed for the banking industry. We enjoyed the good life for awhile, learning to love our new fee free accounts, but like in many relationships, we starting taking this feature for granted, forgetting about the days where having a bank account was a privilege that you had to pay for and not a right. The banks were perfectly happy keeping their deposit accounts free, for this was also a time for free love and cheap loans. Banks could replace lost fee revenues with interest income from all the loans they were making. Everyone knows that loans are much more profitable to banks than deposits anyway, so everyone was making out like bandits. The banks were even loaning money to each other in record amounts in order to increase profits. That was until the housing bubble burst, the market crashed and everyone started pointing the finger at those greedy banks.
Credit froze. Not only did consumers find it hard to get loans, businesses and even the banks themselves struggled to find ways to come up with the cash to service all those deposits they had logged into their systems. People started withdrawing their money from the banks and we watched bank after bank collapse, forcing the FDIC to cover millions in deposits that the banks could not fund. The federal government stepped in and gave the banks some much needed bailout cash, thanks to the very folks that precipitated this fall from grace. (Yes, I take the unpopular position that consumers, not financial institutions were the ones that created the mess we’re in right now), but this money simply kept the bigger banks with the deeper pockets afloat.
Then, the American Taxpayers decided to start demanding a refund of all that bailout money. In order to keep customers coming in, many banks were forced to prematurely pay back the money they were using to keep the ball rolling. Because they had no money to loan, interest income was at a standstill. Even if the banks had the money to loan, most wouldn’t have done it for the simple fact that they were simply afraid that they wouldn’t get it back.
That leaves us with the here and now. Customers are outraged at the fact that banks want to reinstate deposit account fees again. “It’s not fair,” they cry. “We want free checking! We deserve free checking!” But the truth of the matter is that the banks really don’t have a choice in the matter. If banks are going to survive and the economy is going to improve, they have to be able to generate a profit. The more money a bank makes, the more willing it will be to loan again, which makes the recovery an actuality instead of just talk on CNN.
