New regulations becoming effective later this year will reduce the amount of revenue that banks generate from certain kinds of fees. Whether or not the fees were fair depends on whether or not you were a banker or a customer. What’s not arguable is that the lost revenue from these fees is going to hit banks right on the top line.
Bank of America Corp. (NYSE: BAC) has decided to take its medicine early by eliminating its checking-overdraft protection later this summer. The new banking regulations require banks to get permission from a customer before charging for overdrafts. Other big banks, including JP Morgan Chase (NYSE: JPM) and Wells Fargo Corp. (NYSE: WFC) haven’t announced when they plan to meet the new regulations.
One of the things that is apparently headed for the dustbin of history is the free checking account. The Wall Street Journal reports that consulting firm Marsh & McLennan estimated the cost to a bank of a free checking account to be $250-$300 per account. Bank of America estimates that it stands to lose $600 million in revenue by eliminating its overdraft fees, and it is considering killing its free checking to help make up the difference.
The lost revenue from overdraft fees hits smaller banks even harder, especially those that depend on service charges for a good portion of their revenues. City Holding Co.
(NASDAQ: CHCO) receives 28% of its core revenue from service charges, TCF Financial Corp. (NYSE: TCB) gets 26%, and Regions Financial Corp. (NYSE: RF) gets 18%. Bank of America gets 12% of revenues from service fees, not including securities gains. The FDIC reported that as a group, US banks collected $9.4 billion fees in the first quarter of 2010, 16.5% of all non-interest income.
To make up for the lost revenue, the banks are going to put pressure on customers who don’t currently generate what the bank considers to be enough revenue. A customer who keeps a low-volume checking account with a small balance will virtually certainly be made to pay a fee of some size for the privilege of maintaining that checking account. The fees are likely to be tiered so that account holders with larger balances and direct deposit will pay lower fees.
What is most likely to happen is that many customers will just close their checking accounts. A credit or debit card is a perfectly good substitute at most merchants, and on-line bill paying programs mean customers don’t need to write checks for monthly bills — and they save the stamp money too. Of course those on-line services will probably have service charges added as well.
A smart move might be for the banks to charge utility companies and other businesses a small fee for the automatic bill paying services rather than charging customers a new service fee. That way the banks could say they are offering a new free service to replace the lost free checking service.
An officer at Bank of America told the WSJ, “Customers will have a choice [of] bringing more relationships to us or paying a maintenance fee.” That’s not going to make banks any more popular with their customers.
