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What happened to Free Checking?

How To Save
By Paul Richter, PawnGuru Consumer Investigator

Poor people get treated badly by banks. In large measure, that’s why over 30 million people in the US rely on pawn shops for financial emergencies. While 93% of US households have a bank, only 65% of pawn shop regulars do, according to a PawnGuru study of 580 pawn customers. Of that 65%, nearly 70% said they’d incurred an overdraft, low balance, or related service fee. That’s more than 2 times the national average of 30%.

That prompted me to ask: when did banking get so expensive? What happened to free checking accounts, which seem to get scarcer every year? I started out my research trying to prove that banks get their profits from banking fees, so I could explain what was going on. After all, it seemed like a reasonable hypothesis. I kept seeing articles like CNBC’s “Bank fees have been growing like crazy”. And I heard from countless PawnGuru users about their overdraft fees. So I figured I was onto something.

So I hypothesized that the easiest way for a bank to increase profits would be to squeeze consumers– to increase revenue while keeping costs constant. Since banks didn’t seem to be lending very much post-2008/2009 financial crisis, that left one possibility: banks must be increasing their profits by increasing their banking fees.

Unfortunately, I was almost entirely wrong. In fact, banking fees made up about a quarter of banking profits in 2000 and a smaller amount of their profits in 2016. Overall, bank fees are trending downwards.

To prove this, I gathered FDIC (Federal Deposit Insurance Corporation) data from 2000 to today and chained it to the Consumer Price Index (Inflation) in 2000 dollars. I found that service charges, otherwise known as bank fees, peaked in 2009 in terms of real dollars before declining again. Banking fees have been pretty flat over these 17 years.  Meanwhile, it seems that Pre-tax Net Operating Income, otherwise known as profits, have almost no correlation to banking fees.

That left me with two questions: One, why exactly do banks charge fees? Two, why does it feel like bank fees are increasing, if they aren’t in reality? And finally, if not bank fees, how do banks make their profits?

Why do banks charge fees?

They charge fees because they need to pay for the overhead of having accounts.  Each bank branch needs to be staffed, each ATM needs to be filled with money.  According to Nessa Feddis, Vice President and Senior Counsel at the American Bankers Association, each bank account costs the bank an average of $200-$300 each year. Banks charge fees in order to offset the costs of maintaining accounts.

So why does it feel like banking fees have been increasing?

There’s two parts to this story.

We’ve established that total bank fees have not increased.  The total amount of bank fees collected, adjusted for inflation, has absolutely decreased since the 2008/2009 financial collapse.

But bank fees feel like they’ve been increasing because individually, they have. The size of the fees themselves are growing every year. However, the number of people actually paying banking fees has decreased. Overdraft Fees, ATM Fees, and Minimum Balance Fees make up 75% of fees for people who opt-in to overdraft protection. According to a consumer survey administered by Bankrate, these 3 fees have increased significantly.


It’s important to understand the role of overdraft fees. In 2010 the Fed passed a law that people had to opt-in to overdraft fees. That resulted in the number of people who allow banks to charge overdraft fees has decreased. According to the Consumer Finance Protection Bureau, overdraft fees account for 71.9% of the big three account fees. Currently, 8.3% of people pay 73.7% of overdraft fees. This is indicative of a broader trend, and it’s why PawnGuru users feel so angry and squeezed. Bank fees have increased, and are more concentrated among a smaller group of people. The result? Bank fees are increasingly targeting those who can least afford to pay.

So if banks don’t make their profits through banking fees, how do they make their profits?

Profits are revenue minus expenses. This is what bank profits look like for the past 16 years, according to the FDIC.

You can see that expenses and income tend to follow each other. You can also see that profits, in terms of real dollars, have been increasing over time, with a dip around the financial crisis.

The point? Banks are definitely making more money, but it’s not from an expansion of fees. So where is it coming from? Consider that banks make their money through 2 means: Interest Income, and Non-Interest Income.

Non-Interest Income is comprised of banking fees, fees to set up services, and fees to take out loans.  

More bad news for my hypothesis: it looks like banks consistently lose money on Non-Interest Expenses. Furthermore, they are losing more money each year in real dollar terms.

So how are banks increasing profits?

Banks’ Interest Income, adjusted by inflation, is relatively flat over time.  Their Interest Expenses have dropped impossibly close to zero.

There’s our answers: Banks are making more profits, primarily from Interest Income, because their expenses are lower.

Wait, why are bank expenses lower?

Interest Expenses are just interest payments paid out.  Here’s a telling graph from FRED, the data service provided by the Federal Reserve.

This is the Federal Reserve Interest Rate since 2000.  This is the overnight interbank lending rate, the rate banks charge each other to borrow money.  Banks sometimes have to borrow money in order to replenish cash reserves after they lend out money.  Banks borrow money from other banks.  If the interest rates on loans are close to zero, then bank loan costs are close to zero.

Here are Interest Expenses again.

It’s almost a perfect match.

In conclusion: banks did not increase profits by raising banking fees. Total bank fees are stagnant or slightly decreasing. But the proportion of the population that bears them is shrinking. That remaining population is disproportionately poor, and least equipped to handle them. This bodes badly for including low-income Americans, especially into the financial mainstream.

Banks increased profits by lowering their lending expenses while keeping their revenue about the same.  Banks did not lower their lending rates, like on mortgages, as much as they lowered their borrowing rate, like on checking deposits and savings accounts. Banks are making record profits because they increased their spread.

What happened to free checking?

30 million Americans regularly use pawn shops.  Because we have direct access to data on the market we can provide some insight into these consumers.  According to PawnGuru studies, 32% of pawn shop regulars have no bank accounts, compared to 14% of Americans and 8% of American households.  Of the 32% who say they have no bank account, 67% say they don’t have enough money to open a bank account, 31% say there are too many fees to make accounts worthwhile.  Nearly 70% of pawn shop regulars with a bank account have incurred overdraft or low-account fees, compared to the national average of 30%.

Free checking accounts still exist, if you are rich enough. The minimum balance requirements, the ATM withdrawal fees, the overdraft fees have all increased while affecting a smaller and smaller segment of consumers. The minimum balance requirements and the overdraft fees almost exclusively hit poor people. And the ATM withdrawal fees hit poor and rural people harder because they live in areas which are underserved by banks.  If you are rich enough, you can have all the free checking you want.  If you are poor, you have to pay the banks to have access to your money.



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What Happened to Free Checking?
What happened to free checking? A PawnGuru study of service charges, overdraft fees, out of network ATM fees. We explore banking fees, profits, and how low-income Americans navigate finance.
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