The overdraft fees explored in Tuesday’s report by the Consumer Financial Protection Bureau aren’t the only way banks have found to pull more revenue out of customers. Big banks in particular have been busy backing away from offers of free checking accounts, with PNC Financial Services Group (PNC) announcing on Monday that it would gradually levy charges of $7 to $25 on its accounts, leaving just two big players—Ally and Capital One (COF)—in the free-checking game.
The big-bank retreat from free checking since 2007 has sent nearly 24 million checking-account customers to the small banks and credit unions that still offer the free service, according to Moebs Services data cited in the Wall Street Journal on Tuesday “They’ve lost checking accounts and they’ve lost them on purpose,” Mike Moebs, the research firm’s chief executive officer, told the newspaper.
PNC is actually late to the party. A September study by Bankrate, a personal finance publisher, found that only 39 percent of checking accounts are still free, down from a peak of 76 percent in 2009. The average monthly service charge is $5.48—up 25 percent from 2011—and the average balance required to avoid a surcharge has climbed to $723. Why the shift in big-bank strategy? Turns out big banks (and their shareholders) haven’t been keen on revenue-decreasing consequences of a 2010 rule by the Federal Reserve requiring that customers be warned in advance of overdraft fees. As a result, PNC’s service-charge income fell 24 percent in 2011, and checking-account fees became appealing.
In addition to generating revenue, paid checking accounts are also a great way to shed low- or no-margin customers—the masses who require the full services associated with a free checking account, but don’t have enough money to make it worthwhile for a bank. In management-speak, it’s known as “firing the client.” ”A lot of the customers that have walked out the door are customers they aren’t shedding a tear over,” said Bankrate analyst Greg McBride. “Somebody who only ever had $300 in their checking account and didn’t have any other accounts at the bank wasn’t very attractive.” Big banks in general such as PNC aren’t too keen on “value” customers these days. In recent SEC filings, PNC calls out its target sectors as “mass affluent consumers, small businesses and auto dealerships.” In explaining the changes, a PNC spokesman says the bank feels the fees are reasonable, given a recent study that said each checking account costs a bank $250 to $300 a month.
Maybe that push to shed low-end customers helps explain one of the CFPB’s latest findings: the bigger the banks, the bigger the fees. The median overdraft fee at large institutions last year was $34, compared with $30 at smaller banks, according to the 72-page CFPB report (PDF). Many smaller banks, on the other hand, are still allowed to collect handsome swipe fees from merchants that take debit cards, a revenue stream that was crimped at big institutions by the so-called Durbin Amendment in 2011.
Small banks also might be playing a bit more of a long game by sticking with no-fee checking. Free or low-cost accounts help them keep market share and more important, win young customers who may struggle to keep the four-figure balance that many banks require to avoid a fee. If a bank can hang onto those customers, it can cash in on a later stream of revenue as they buy houses, cars, stocks, and eventually, annuities. ”Free checking was part of their model long before it became fashionable,” says McBride.
Ally Financial, a now-rare example of large bank that still offers free checking, does so because as an online bank, it doesn’t have to pay for brick-and-mortar locations, explains spokeswoman Gina Proia. ”Our model is such a lower cost-structure and we’re able to pass along a value proposition to our customers,” she said.