By Ray Birch
LAKE FOREST, Ill.—Free checking is in the “coffin,” according to one new report, which has found a rapid acceleration in the number of credit unions eliminating their free checking offerings.
A new report from Moebs $ervices indicates there has been a 59.2% decline in free checking offered by credit unions so far in 2019 (see chart). As a result, the percentage of credit unions offers free checking—a long-time point of pride by the CU community–is now almost exactly the same as banks, with the study finding just 20% of CUs now offer free checking, compared to 19.4% of banks.
“At the end of 2018, 49% of all credit unions still offered free checking, and 74.9% did in 2017,” shared Michael Moebs, economist and CEO of Moebs $ervices. “Now, only 20% of credit unions nationwide offer this once-dominant service. Credit unions led the free checking surge starting in 2001, and now CUs are dramatically dropping the service.”
A Simple Reason
The reason is simple: cost, said Moebs, pointing to shrinking net interest margins and rising checking costs that are forcing the shift.
“Free checking peaked in 2009 with nearly 85% of credit unions and 78% of banks offering this service,” explained Moebs. “Since 2009, banks have steadily stopped offering free checking. Credit unions hung on through 2017, but in last two years have rapidly discarded free checking—especially this year.”
Moebs reiterated that cost is the reason for the dramatic shift this year.
“Our studies have shown for more than two decades that over 94% of all transaction accounts, including free checking, are not profitable,” he said, noting that CUs have begun–as banks started doing several years ago—moving toward relationship pricing for checking.
Two Major Reasons
The Moebs Free Checking Study shows two major reasons for the unprofitable nature of free checking, as well as all transaction accounts:
- Too many people involved in servicing free checking as well as all checking accounts
- The Durbin Amendment substantially restricted the price of swipe fees
“Checking expenses are too high because there are too many people involved in delivering transaction services,” said Moebs. “Most bank and CU management do not want anyone waiting for a teller, which is a very good service orientation, but also very expensive.”
Blame the Government
Yet, the most expensive aspect of the transaction business has been the government-controls on the price of debit card transactions, according to Moebs.
“The U.S. government curtailing the interchange fee, or swipe fee, to no more than 26 cents from a free market price of 44 cents was the death knell, especially for free checking,” said Moebs.
To keep free checking profitable, Moebs said the following needs to happen:
- No interest can be paid on free checking, unless the balances are high enough to compensate for the interest expense paid
- The volume and revenue generated from ancillary transaction fees—swipe fees, overdraft, NSF, stop payment, return of deposited items and transfer fees—need to offset the costs
- Website and branches must be fully transparent in communicating free checking features
‘Not Lost Forever’
“Free checking is in the coffin, or no longer a dominant service,” said Moebs. “Yet, free checking is not lost forever. The consumer still demands free checking. And if banks and credit unions control costs, and the community banks and credit unions—not subject to government price restriction—get a free market price for the swipe fees, along with transparency in features, then free checking will still survive with some depositories.”