New regulatory reforms aimed at reining in big banks' excessive profits and helping retailers cut costs might actually end up hurting consumers.
The new debit-card swipe rule set to take effect Saturday lowers the fees banks can charge retailers for debit card transactions to 24 cents per transaction. The current average for such fees is 44 cents per swipe. While that's good news for retailers, consumers may face higher banking fees as a result.
Proponents of the swipe fee reduction argue that lower fees for retailers should help the industry lower costs and pass on savings to consumers. But banks, facing a multibillion-dollar, industry-wide loss in swipe fees, are paring down free checking options and charging more in overdraft and ATM fees to make up for the shortfall. Swipe fees helped subsidize free checking for millions of Americans, so while a burden has been lifted from retailers, another has been effectively shifted to consumers, experts say.
[In Pictures: 10 Ways to Start Earning Extra Money Now.]
"The decline in free checking is a more recent development and is pegged to regulatory changes dealing with both overdraft [fees] and debit cards," says Greg McBride, senior financial analyst at Bankrate.com. "The cost of providing free checking accounts was completely underwritten by overdraft and debit card swipe fees. With both of those revenue streams now being constricted, free checking becomes the obvious casualty."
Only 45 percent of non-interest checking accounts are free today, down from 65 percent in 2010 and 76 percent two years ago, according to a survey by Bankrate. Fees, meanwhile, are rising: The average monthly tab for a non-interest account is $4.37, up 75 percent from a year ago. The average overdraft fee amounts to nearly $31, up 1 percent from last year.
U.S. News talked to the experts for tips on how consumers can sidestep hefty fees and keep more of their hard-earned money.
Enroll in direct deposit. While it's true that the number of truly free checking accounts is dwindling, many banks will waive checking fees if you enroll in direct deposit or maintain a certain minimum balance. "The point is they're not going to give away free checking anymore," McBride says. "The silver lining in that dark cloud of eliminating free checking is that many banks are instituting fee waivers so that something as simple as direct deposit could be sufficient to get the fee waived."
The percentage of banks offering "free" checking jumps to more than 90 percent after accounting for fee waivers, McBride says. So although it seems like free checking is on the path to extinction, consumers, for the most part, can still access that benefit by overcoming a few small hurdles, he says.
Shop around. But what if your employer doesn't offer direct deposit or you don't have the cash flow to keep a required minimum balance? You can still get free checking as long as you're willing to take your business elsewhere.
An increasing number of smaller community banks, credit unions, and online banks are luring customers by offering a more extensive lineup of free checking options, experts say. And if you're worried about getting slammed with ATM fees by belonging to a tiny, regional bank, that concern has largely become a non-issue as smaller banks have joined larger ATM alliances, allowing customers to access their money free of charge at thousands of locations around the country.
Some online banks even offer fee reimbursement programs, which refund ATM fees that customers incur.
"They've really tried to level the playing field to make these banks very consumer-friendly," McBride says. Consumers can research banks offering the best free checking options using Bankrate's "Find a Checking Account" feature.
Keep close tabs on your balance. "Avoiding overdraft fees is the financial equivalent of walking and chewing gum," McBride says. With the increasing seamlessness of banking information on computers and mobile devices, there's no excuse for overdrawing your account, because you can generally confirm account balances before you make purchases. "It's completely avoidable, as long as you keep close tabs on your available balances," he adds.
Nevertheless, if you slip up and overdraw your account, experts recommend having your savings account tied to your checking account to cover shortfalls. That way you avoid hefty overdraft fees and sidestep the embarrassment of having your card declined in the checkout line.
"We recommend that consumers have that protection because it's not just one fee," says Linda Sherry, director of national priorities at Consumer Action. "If more than one payment or debit transaction bounces, you will pay a fee for every instrument that bounces."
Some banks offer to link a line of credit to your checking account to cover overdrafts. Experts caution consumers to pay off the balance as soon as possible, because while you might avoid a $30 overdraft fee by leveraging a line of credit, you could get slammed with interest fees on the borrowed money if you don't pay it off.
Plan ahead when you need cash. Today, you'll get dinged $3.81, on average, to use an out-of-network ATM, according to Bankrate's survey. To avoid those pesky fees, plan ahead when you know you'll need cash or keep some greenbacks on hand for emergencies so you won't be forced to accept outrageous ATM charges. "Go online or use your mobile device to find nearby ATMs in your network," McBride adds.