The era of free checking accounts is coming to an end. Many consumers will face an extra $144 a year in account fees, plus higher annual dues for their debit cars, and increased ATM charges may be on the way.
J.P. Morgan Chase (JPM), which has has 27 million checking accounts, has announced it will impose fees ranging from $10 to $12 per month on those accounts -- though the fees can be avoided if you maintain a minimum daily balance of $1,500 or set up a direct deposit of $500 or more each month into your account.
"Honestly, we are looking at the pricing of all of our products and our revenue streams based on some of the changes that are going on right now," says Christine Holevas, spokeswoman for Chase.
Meanwhile, Bank of America (BAC), which has 57 million consumer and small business customers, has started a pilot program to charge new customers in Arizona, Georgia and Massachusetts for checking accounts, says spokeswoman Anne Pace. The four account options on offer have fees ranging from $6 to $25 a month, but customers maintaining a minimum daily balance of $5,000 won't have to pay the fees.
When the results of the test programs are clear, Pace says, the bank will decide whether it will impose the fees nationwide.
A Push Back Against Financial Reforms
Brian Foran, a banking analyst at Nomura Securities International In New York, says the rising fees are part of an effort by the banks to recoup some of the income they lost from two recent regulatory changes.
Thanks to last year's passage of the consumer-protecting Credit CARD Act, the Federal Reserve has changed the rules so that banks can no longer automatically charge overdraft fees on debit card purchases. Customers must actively opt into allowing their account to be overdrawn, or their charges will simply be rejected when their account balance is insufficient.
The larger portion of banks' lost income comes from a reduction in the interchange fees paid on the use of debit cards. Merchants typically paid 2% of a transaction to the banks and credit card companies, but that has been reduced. Under new rules adopted under the Durbin Amendment -- passed as part of last year's financial reform law -- banks can only charge 12 cents per transaction, a decline of about 70% from what they previously earned.
Foran says he estimates banks made $8.7 billion in interchange fees before the new regulations, but will now make only $1.4 billion, a loss of $7.3 billion in revenue.
"J.P. Morgan has a secondary motivation of trying to send a pretty clear message to Washington that if you regulate prices, we have to charge more somewhere else," Foran says.
Looking for Cover to Recoup Their Lost Billions
While big institutions like Chase and Bank of America are the first movers in this trend, smaller banks are preparing to take similar steps. U.S. Bancorp (USB) said on its recent investor conference call that it will likely be forced to implement some kind of fee structure.
"In general, the smaller banks are looking to the bigger banks to lead the way because that will give them air cover," Foran says.
Nomura estimates big banks may make up as much as 40% of their lost revenues through checking account fees, $1 billion to $2 billion more via annual fees for debit cards, and $500 million to $1 billion by reducing their rewards program benefits for debit transactions.
"Every bank knows that Durbin killed free checking, and every bank knows they need to raise fees, but no bank is terribly excited about being the first bank to raise fees because when you do, a bunch of customers are going to leave the bank and go to some other bank across the street," Foran says.
Lower-Income Customers Will Leave
In an investor's day presentation last month, Chase estimated that 15% of its customers will no longer be able to qualify for free checking. "Based on current attrition rates, we expect 50% to 60% of these customers to leave Chase within the next year," the bank said.
The bank expects to lose many of the lower-income customers it acquired when J.P. Morgan took over Washington Mutual in September 2008 after it was seized by bank supervisors in the largest bank failure in U.S. financial history.
Under the new Chase pricing plan, most customers will be charged $12 a month for their accounts unless they meet the requirements for avoiding the fees. But former WaMu customers in California, Oregon and Washington state will only be charged $10 a month, Holevas says.
In addition to its new checking account charges, Chase has also started a pilot program to boost the fees it charges non-customer for withdrawals from its ATM machines in Texas and Illinois. The fee will be $5 in Illinois and $4 in Texas, up from the current nationwide withdrawal fee of $3. TD Bank Financial Group (TD) and PNC Financial Services (PNC) are also raising their ATM fees.
"You never make tons of money on ATM fees to non-customers, but the idea is you really don't care if you piss off someone else's customer," Foran says. "But it's never going to come close to offsetting the lost revenue from the Durbin Amendment."
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