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Free Checking Endangered at Many Banks

WICHITA, Kan. -- The pressures are too much.

A lengthy recession, an extended period of low interest rates, new and costly regulations, and the effect of two years of bank and credit union failures mean the idea of free banking services such as free checking likely is going the way of the free toaster.

The loss of free checking means that unlike in the recent past, more customers will have to maintain minimum balances, agree to write only so many checks a month, or receive their monthly statements electronically to avoid paying monthly fees on their checking accounts.

Up until recently, the elimination of free checking services has been mostly at the hands of the nation's largest banks, such as Bank of America and JPMorgan Chase.

But that development is working its way down the chain.

And small-bank and credit union executives and industry experts said it's a development that's likely to become a trend, though there probably will be some holdouts.

"I won't say it will be nonexistent, but it will be greatly diminished," Terence Roche, a consultant at Cornerstone Advisors in Scottsdale, Ariz., said about the fate of free checking.

Just to make clear, so-called free services such as checking have never been free, Roche and executives said.

More than a decade ago, more financial institutions began to market free checking as a way to draw in more depositors and to keep up with the offerings of their peers.

But back then, interest margins were a lot more manageable, profits were higher because of a growing economy, and regulations restricting bounced-check charges weren't in place. And, executives said, there was less regulation for institutions, which meant lower operating costs.

And some banks pursued free checking based on the notion that such an offering would bring in a greater percentage of customers who would bounce checks, Roche said.

"Don't get the impression that free was something altruistic," he said.

In many cases, customers who habitually bounced checks meant that banks were able to offset the costs of offering free checking just from bounced-check fees, or what bankers call non-sufficient funds, or NSF, revenue, Roche said.

But NSF revenue was impacted last year when the Federal Reserve put into place a new overdraft rule. The rule requires banks to give customers the option to choose whether they want overdraft protection on their ATM and debit cards. If they don't choose overdraft protection, then any transaction using an ATM or debit card on an overdrawn account will be denied immediately. And banks aren't able to collect overdraft fees on those transactions.

Moebs Services, an Illinois-based financial institution analysis firm, estimated that the cost of implementing the new rule and lower NSF revenue will end up costing banks and credit unions $6.3 billion.

Chuck Bullock, CEO of TECU Credit Union, said the new overdraft rule is only one of several issues pushing credit unions' costs higher.

"The debit interchange is under fire, the assessments that all federally insured financial institutions are having to pay, the ATM updates that are required for us to make by March 2012 ... you have all these things that are impacting us financially," Bullock said.

"I would have to think our industry as a whole will have to be evaluating that checking fee structure. You're probably going to see minimum balances increase, higher fees elsewhere, institutions trying to drive their members toward electronic services such as e-statements, online banking."

Bullock said that even though a credit union is a nonprofit cooperative and has "more flexibility" than a for-profit bank to resist passing higher costs on to customers, "we still have a bottom line to make."

Lyndon Wells, executive vice president of Intrust Bank, said Wichita's largest locally based bank had no other alternative than to eliminate free checking if it was to keep in place its extensive local branch network, online offerings and ATMs.

Intrust notified customers in November of the pending change.

What it's offering in place of free checking are several options that would allow customers to avoid a monthly service charge but not without meeting certain conditions, such as maintaining a minimum balance in their checking accounts or increasing their use of electronic banking services.

"It's a challenge to be able to deliver the service our customers expect and to do it fairly and competitively," Wells said. "And we believe we've tried to strike that balance."

Wells said Intrust officials looked hard at making the change, realizing that it might lose some customers from the elimination of free checking.

"We did extensive analysis of our portfolio in all account types and laid that aside competitive information in the marketplace," he said.

Cornerstone's Roche said banks that have eliminated free checking likely had a good idea that they would lose some customers because of it.

"I think there's an expectation that the customer loss will be acceptable," Roche said.

Roche said a number of factors, including the convenience customers would have keeping their checking account at the same institution, and banks providing ways for customers to avoid monthly fees, likely will minimize the loss of customers.

"I think that there will be some attrition," Roche said.

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