Is This the End of Free Checking?

Free checking is going the way of the free lunch.

Once a common benefit at most commercial banks, free checking is becoming more of a hassle than a perk. Getting your checking fees waived increasingly requires meeting so many conditions and wading through so much fine print that, for many customers, it’s hardly worth the trouble.

“Banks, just like airlines and local governments, need to fill the revenue gap,” says Greg McBride, the senior analyst for Bankrate.com. “They’re looking to fee increases to do that.”

Banks are experimenting with a variety of tactics to increase revenue. In May, Fifth Third Bank (FITB) rolled out its Secure Checking Account program, which costs $8 per month and includes identity theft alerts, discounts on a safety deposit box and a connected emergency fund savings account. And regional bank BBVA Compass offers a program called Built-to-Order Checking, a free no-frills account that offers add-on features for $2 a piece, including interest accrual, free use of other banks’ ATMs and one overdraft fee pardon per year. Last year, Chase (JPM) renamed its Chase Free Checking program Chase Checking; it is free only for accountholders who use direct deposit or make at least five debit card purchases per statement period -- otherwise, users pay $6 a month.

Changes to federal regulations have triggered the cascade of new fees. Already cash-strapped banks anticipate declining revenue from credit cards as rules from the CARD Act take effect, says Hank Israel, director of Novantas, a financial services consulting firm in New York. The Federal Reserve has also said it plans to address overdraft fees, which are projected to bring in $38.5 billion in 2009, according to industry consultant Moebs Services, which has studied overdraft fee strategies. That means fewer profits to subsidize free accounts and the costs of maintaining branches.

Expect a slow transition away from free checking as banks test what changes will bring in revenue without alienating customers, Israel says. “It comes down to, what’s more important: convenience or price?” he says. Consumers who value local branch services will need to pay for that convenience while cost-conscious accountholders are likely to be steered toward online-only accounts, which cost less in overhead but offer less accessibility.

Banks are also likely to add more strings, such as requiring regular checking account use to avoid fees or obtain better deals on other products, McBride says. For example, Wells Fargo (WFC) requires an account to apply for its credit cards. Chase’s new Mortgage Cash Back program offers 1% back on their monthly Chase mortgage payment when you make automatic payments from a Chase checking account.

“For most people, the answer is still to find a free checking account,” McBride says. Look for free-account conditions you can easily meet, as well as policies and features that can help you avoid other fees (for example, lots of local ATMs and low-cost overdraft protection). Your employer can also help you score free checking. Many companies offer access to credit unions or have special relationships with big banks that yield higher-tier accounts without the regular fee.

Here are five options for free checking accounts at national banks:

Bank of America My Access Checking Account 
Requirements: Customers who open an account online will have the monthly maintenance fee of $8.95 waived. 

Chase Checking 
Requirements: Accountholders who use direct deposit or make five debit transactions per month can avoid the $6 monthly service fee.

Citibank EZ Checking 
Requirements: Customers who use direct deposit, make two monthly bill payments or maintain a combined $1,500 balance will pay no fees. Otherwise, they’ll pay a monthly maintenance fee of $7.50 to $9.50 as well as 50 cents to $1 per check (varies by state).

SunTrust Free Checking
Requirements: None.

Wachovia Free Checking
Requirements: None.

*Data from individual banks.