Up With Fees, Down With Free Checking

If you believe that last year's Bank Transfer Day prompted the big banks to take an introspective look at the way they treat their customers, think again. Banks are raising fees again, despite customer complaints and regulatory scrutiny, according to the findings of three studies released over the past four months.

Fees go up, regardless of customer anger
A report released in late February, called the "2012 U.S. Bank Customer Switching and Acquisition Study," found that over the past three years, there has been an increase in customers switching banks because of escalating fees. Three of the biggest U.S. banks -- Bank of America (NYS: BAC) , Citigroup (NYS: C) , and Wells Fargo (NYS: WFC) -- together lost 1.5% of deposits last year because of customer defections.

Checking accounts seem to be particularly under attack, and banks have been tacking on fees right and left -- especially for overdraft protection -- angering consumers and prompting regulators to step in, not to lower fees, but to make them more transparent. Yet a recent study by the Pew Charitable Trusts notes that fees have risen since 2010, and that disclosure statements from banks are still difficult for customers to understand. Not only that, but banks have placed fees upon fees, charging an extra fee if overdrafts are not repaid within a certain timeframe.

Despite all this bad press, banks are on a tear this year, obviously determined to stamp out the evil in their midst that is free checking. This August, Wells Fargo is placing a fee on former Wachovia free-checking customers, unless they fulfill certain criteria. Wells has done this to different groups of customers at least two other times within two years, even going so far as to convert accounts that the bank itself had grandfathered.

Suntrust Bank (NYS: STI) is also adding fees to basic checking accounts in August, except if customers keep to the stringent new rules. The bank will also start charging full overdraft fees, with no exceptions, which were allowed in the past. US Bancorp (NYS: USB) is joining in the fun, too, upping its overdraft fees now, and then again, sometime later this year. In return, the bank says it will no longer charge customers for closing their bank accounts "early."

Fool's take
Apparently, customer outrage only works with certain bank actions -- as when Bank of America reversed its planned debit card fee last year. Even Citi berated B of A for the fee, at the same time it was targeting its own checking customers. Checking accounts are specifically under fire from banks, which claim that it costs them about $250 per year to host one. This sounds a little fishy to me, particularly since 96% of the biggest banks offered free checking just three years ago, and not even 35% do so today.

What's changed? For one thing, banks got snarky when regulations throttled their ability to charge outrageous debit card swipe fees back in 2010, something banks cite as a reason for cranking up checking account fees. Perhaps another is that net interest margins have narrowed a bit. The other is that they just don't seem to want to provide checking accounts anymore.

Can these big banks survive if customers continue to defect? Probably, but in the long run, lost deposits and bad press could take a toll. If there is another great exodus of existing customers later this year, which I think is likely, it is possible that they might rethink their behavior. I doubt it, though, and investors would do well to start looking at the smaller, regional banks to which customers are fleeing -- because that looks to be where the future of commercial banking is moving.

While big banks continue to sputter, why not turn your attention to smaller, well-managed banks? See why Motley Fool banking analysts consider these to be The Stocks Only the Smartest Investors Are Buying by reading our special report today. Don't hesitate -- it's free.

At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above. The Motley Fool owns shares of Citigroup, Wells Fargo, and Bank of America and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Wells Fargo. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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