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It Costs Banks to Provide Customers Free Services
YOUNGSTOWN, Ohio -- Banks offer free checking (some free paper checks as well), free online banking and bill paying, free bank by phone and free bank by mobile phone, free debit cards (some offer rewards programs as well) and free use of their ATMs.
As long as a customer doesn’t bounce a check or use an ATM owned by another financial institution, he can avoid paying fees for routine transactions. After investing hundreds of thousands, if not millions, of dollars in computers, phone lines and software, banks in essence pay their customers to use their services.
Recouping at least some of their investments by imposing fees on what they’ve offered so long for free, or raising fees on other products and services, is not without risk.
Remember when in the 1980s a few large banks decided they would impose the annual fee of $15 on the MasterCard and Visa credit cards they issued, fees the industry routinely waived. The banks retreated quickly. Today even American Express offers a credit card that carries no annual fee.
Remember 1993 when First Chicago Bank (now part of JP Morgan Chase), then the 10th largest bank in the country, decided it would charge its customers $3 if they wanted to transact business with a human teller? It put the bank in the national spotlight and the glare of publicity caused it to quickly abandon the practice.
Remember 2 years ago when Bank of America decided it would charge its customers a monthly fee of $5 to use their debit cards to make purchases? The bank announced the fee in late April. On Nov. 1, 2011, Bank of America announced the card would not impose a monthly fee.
“We do offer a lot of services you don’t pay for,” Jim Swift agrees. Swift, who’s worked at Farmers National Bank 30 years, is its vice president for retail operations. “Banks have conditioned their customers to expect products for free.”
While it costs the bank less for its customers to conduct their banking electronically, it still offers free checking. The number of customers who write paper checks, most of them older, is declining as younger customers take to banking online or on their smartphones without giving it a second thought.
Farmers Bank is working to go “totally green,” Swift says, but still provides free “classic checking” to customers age 65 and older who keep an average balance of $1,700 in their accounts while most who have free checking maintain a balance above $1,000.
Huntington Bank not only offers free checking (Asterisk Free Checking), its “Fair Play” initiative allows a one-day grace period to make a deposit to its customers who overdraw their accounts, says Frank Hierro, president of its Mahoning Valley region. For those who don’t remedy their shortfalls, it has lowered its fees for those who rarely overdraw their accounts.
The number of new customers and households who have switched to Huntington has more than compensated for the bank subsidizing checking accounts and customers’ use of debit cards, he says.
At Cortland Banks, its retail-banking manager, Danielle Cantrell, notes the difference in expense for her to process a paper check and a debit card purchase or ATM transaction “is not a significant cost” but declined to be more specific than to say, “It’s minimal.” The number of customers who conduct their business with a human teller “is decreasing but a branch is still necessary to serve our customers,” she says. “Free checking remains one of our most popular products” with mobile banking and automatic deposit not far behind.
First National Bank of Pennsylvania continues to offer free checking with one string attached. Customers who use its “Freestyle Checking,” which requires no minimum balance, must receive their monthly statements via email or incur a $2 charge for a paper statement.
MyStyle checking at First National requires no minimum to open and the customer can write an unlimited number of paper checks with no fee per check. But the customer must provide an email address where his monthly statements can be sent. The maintenance fee of $6.50 per month can be avoided if the customer maintains an average daily balance of $300, or a $5,000 combined balance in savings and checking products, has a recurring monthly direct deposit, or makes at least 10 purchases a month with his First National debit card.
PNC Bank, Pittsburgh, which has 6.7 million checking accounts, announced last June it would end its “Free Checking Classic” accounts next June and convert them to “Standard Checking” which carries a monthly charge of $7. (New customers can no longer open “Free Checking” accounts.) That $7 fee can be avoided if the customer maintains an average balance of $500 in his standard account, or if he has monthly direct deposits of at least $500, or if he is 62 or older.
He can also avoid the additional $2 fee for a paper statement by meeting one of the above conditions. Otherwise, if he wants a paper statement and cannot, he would pay $9 a month.
In addition to free checking, Farmers Bank offers a rewards program for those who use their debit cards as payment. Unlike a credit union in Texas that pays its members 10 cents each time they use their debit cards to make a purchase, Farmers awards points toward gift cards. (Its Visa and MasterCard credit cards do offer a cash-back option.) Both rewards programs have proved popular, says Farmers’ senior vice president for marketing, Amber Wallace.
Because a bank earns a switch fee every time a consumer swipes a debit or credit card through a cash register (the merchant must contract with that bank, however), it earns fee income. That allows Farmers to earn income that defrays its expense in offering gift cards, Wallace explains.
Customers are used to paying an annual rent for use of a safe deposit box, but Farmers only recently raised its rents, Wallace says, which it hadn’t touched in 10 years. “Ours were so far below market,” she remarks, but the increase had negligible effect in offsetting the expense of the products it offers for free.
Huntington Bank’s Hierro echoed Farmers’ Wallace as he noted switch fees generate income. He also pointed to Huntington’s ability to reduce the expense it incurs for its delivery systems by spreading it over so many customers. (Huntington has assets of $56 billion.) “Whether it’s 10,000 customers or 100,000 customers,” Hierro points out, “the cost is nearly the same.
Huntington is one of the few banks willing to share its marketing data in such detail. Customers may open a checking account to start, Hierro says, but as they’re treated right, they use more and more Huntington services. For example, a customers who overdraws his checking account incurs only a $23 fee if it happens only once a year. Otherwise it’s $37.50, just above the industry average.
Roughly three in eight Huntington customers avail themselves of five or six services, services that the bank does earn a profit on.
Huntington and PNC have incurred additional expense by replacing their old fleets of ATMs with more technologically sophisticated image-based ATMs. The machines no longer require customers to fill out deposit slips. The image-based ATMs allow customers to photograph their checks and currency before they insert the checks and bills, giving them nearly instant crediting.
Banks do not charge their own customers for using their ATMs. They do charge customers of other banks to participate in a network. Surcharges range from $2 to $6. So a customer of Bank A pays Bank B, say $3.50, for the convenience of using a Bank B ATM and Bank A an additional $2 for making it possible to use a Bank B ATM.
EDITOR'S NOTE: This story appears in the December edition of The Business Journal.
Copyright 2013 The Business Journal, Youngstown, Ohio.
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