How To

The New Generation of Bank Fees And How to Avoid Them

(Keith Williamson)

For many years, banks relied on overdraft fees and sudden interest rate hikes to pump up profits. But recent financial sector reforms have largely outlawed these practices. And while consumers are no doubt jumping for joy, the banks are not quietly accepting the loss of billions of dollars in annual profit. Instead, they have already rolled out a series of new (and perfectly legal) fees, ranging from maintenance fees on previously free checking accounts to innovative charges on debit cards.

Here is a primer on the new bank fees, who is likely to encounter them, and how to avoid paying up:

Low-Balance Customers

The consensus seems to be that many of the new bank fees will fall most heavily on customers with low balances in their checking accounts. In a June 2010 article, the Wall Street Journal noted that the fees will “unfairly whack” customers who have always managed their accounts responsibly enough to avoid the old, now-outlawed fees. “That’s the group that will be most penalized in this environment,” Bill Handel, vice president of research and development for Raddon Financial Group, told the Journal.

Monthly Maintenance Fees

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Free checking accounts are a major target of the new fees. While most consumers “haven’t paid for a checking account in years,” banks are no longer giving them away as a means of bringing customers in.

One way that banks are already beginning to do away with free checking is introducing monthly maintenance fees. HSBC (HBC) North America has already put its customers on notice that their previously free checking accounts will now carry monthly maintenance fees as high as $15. USA Today reported in May that Minnesota-based TCF Financial (TCB) has eliminated free checking, except for those who use direct deposit or satisfy minimum balance requirements.

Neil Cotty, the chief accounting officer at Bank of America (BAC), told Wall Street analysts in April: “you should expect that customers will have a choice of banking more efficiently, bringing more relationships to us or paying a maintenance fee.”

As USA Today wrote, Bank of America had already begun testing annual fees of $29 to $99 on a “small percentage” of credit card accounts. Wells Fargo (WFC) eliminated free checking as well, as of July 1, 2010.

Debit Card Fees

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Additionally, the Wall Street Journal found, some banks are now assessing monthly debit charges on customers who fail to complete a certain number of transactions per month. This, too, is a relatively new fee, likely being used to help offset lost revenue from overdraft fees.

In the past, banks largely ignored infrequent debit card users because of the exorbitant money they were making elsewhere. But now, checking accounts at Fifth Third Bank (FITB) come with a $3.95 monthly debit fee, waived only if customers spend $1,500 or more on their cards. Fraud alerts, another formerly free service, are now cost $5.95.

Minimum Balances

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In early August, Washington’s News Tribune warned consumers that minimum balance requirements are also making a comeback. Adam Levin, co-founder of credit information website Credit.com, told the News Tribune that minimum balances are not only back, but that the required amounts will actually rise. To avoid being penalized, consumers are advised to connect their savings and checking accounts, which should lift the combined balance over any minimum balance requirement the bank might have.

Direct Deposit Requirements

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Minimum balances are not the only new minimum being enforced by major banks. Monthly deposit requirements are also reportedly becoming much more common. In order to avoid a $15 monthly maintenance charge, the Wall Street Journal reports, some banks now require that account holders have at least one monthly direct deposits of $100 or more. Alternatively, five other activities, including debit-card purchases and online bill payments, can be used to avoid the $15 monthly fee.

Given that “more than half of all checking accounts are unprofitable to banks” (according to a Marsh & McLennan Cos. report cited by the Wall Street Journal), deposit requirements represent another attempt to make these accounts more lucrative.

Ways To Fight Back

Just as banks are not meekly accepting the elimination of profitable fees, you shouldn’t just accept the fees above. Here are several relatively painless ways to restructure your banking and finances to avoid being charged:

* Link your checking and savings accounts to form a higher balance than that of either individual account;

* Authorize direct deposit at work;

* Consider switching to an online bank (which usually charge few or no fees) if you do not bank in person;

* Consider switching to a local credit union or community bank (most of which do not and will not charge these fees);

* Use debit instead of cash for most or all purchases to avoid monthly debit fees;

* Enroll in online bill pay to avoid monthly maintenance fees (at some banks).