The new regulations covering the banking industry coming down from Washington were going to have an impact. Although most have been well aware of this, the news that Bank of America (BAC) is planning to end its practice of providing free checking services to accounts with low balances has hit the news channels as if it were the “end of the world as we know it,” to quote the famous song from REM. It isn’t, and, more than that, I believe this trend will be a good thing for most Americans.
A year ago, one of the banks with which I do business eliminated free checking. I had three options: pay the fee; leave the bank; or have at least $10,000 worth of accounts with the bank. I chose option three, and moved a portion of the emergency savings to the bank. In the end, aside from a little hassle, it was a non-event for me. For most Americans, however, option three is a bigger deal because they don’t have an emergency savings account.
You see, I’m not your typical banking customer. My temperament has always been to plan for the worst. Then I don’t hope for the best, as the old saying goes, I tend to redouble my efforts and plan for even worse. This isn’t typical—but it should be as it has led to some good financial habits. An emergency stash of reasonably easy-to-access cash is one of those habits.
Having three to six months of living expenses in an emergency account is one of the central tenants of financial planning. How you exactly define living expenses is, of course, vague. For some it would mean three to six months worth of their entire salary, for others it would be less than that. No matter how you define it, however, $10,000 is a step in the right direction.
I say that because the median family income in the United States is somewhere in the range of $50,000 per year. So, in six months, one would expect the median earning family to have made $25,000, with three months of earnings totaling about $12,500. So, ten grand doesn’t quite get you to the total needed. However, it does get the median family reasonably close.
So, at the end of the day, a shift away from free checking might actually help to alter spendthrift habits at a core level. These are habits that haven’t changed on their own, so I view this as a positive long-term trend.
That said, I believe most will just switch to a bank willing to provide free checking or pay the nuisance fee that will go along with not having enough money in the bank to avoid the fee. I hate ongoing fees. In fact, to me, Apple’s (AAPL) iPhone is a $100 a month umbilical cord from my wallet to the revenue line on Ma Bell’s (for those of a younger generation, that would be AT&T; T) earnings statement—no matter how “cheap” or exotic the phone happens to be. In fact, I view all cell phones the same way. Mind you, I own a cell phone, but it’s of the cheap prepaid variety because I simply don’t use a cell phone enough to warrant anything more. Moreover, I spend about eight to 10 hours a day tied to a computer—why would I want one strapped to my hip?
I’m a dinosaur, at a young age (or so I’d like to think), on these issues, but they don’t negate the impact of ongoing fees. These arrangements are great for the companies that have them and often less great for the customer. While I happen to have a Netflix (NFLX) account for which I pay about $10 a month (so I can get unlimited streaming videos), I view this as the cheaper alternative to cable or FiOS from Verizon (VZ).
Indeed, cable companies, such as Time Warner Cable (TWC), Cablevision (CVC), and Comcast (CCS), and now the phone companies, have managed to turn a luxury (television) into a monthly necessity and, in the process, have continued to increase rates, and corporate profits, almost at will. This is true of cell phone bills, too. Customers are so used to the cost that they just forget about the line item. In fact, these companies use cheap introductory rates as the “come on” to get people in the door in the hopes that the customers won’t notice when the introductory rate gets jacked up. (Try asking a sales representative what the cost will be after the introductory period—he/she usually doesn’t like to talk about it.)
But, it is undeniable, that as corporations these companies benefit from these ongoing fees. Their shareholders benefit, too, since these fees usually lead to reliable revenue streams. For banks, fees have been an increasingly important part of their business for years. Just review the revenue sources for large banks, such as Firstmerit (FMER) or Old National Bancorp (ONB), two banks that weathered the subprime fallout better than most, and you’ll see that fee income is big business.
Many of the rules that have come out of Washington, however, limit where these fees can be earned. So, without many places to turn, eliminating free perks for, effectively, necessary items like a checking account are the obvious places to go. Credit card issuers, including financial giants such as American Express (AXP) and the banks, have responded the same way to regulation limiting business practices surrounding credit cards. The end goal is the same; protect revenue with an increased array of fees.
So, as customers, we need to be cognizant of what we are paying on an ongoing basis for a service. Using Netflix versus cable as an example, I take the $10 a month I pay and multiply by 12 to get $120 a year in costs for Netflix—which more than fulfills my family’s media needs. I then take the $100 per month that cable would cost and multiply that by 12 to get $1,200. It would cost me 10 times as much to get cable—no thanks. Do the same with the new bank fees: $8 (a fair assumption) multiplied by 12 months nets you a cost of about $100 a year. It may not seem like much, and it certainly isn’t as dramatic as the cable example, but that’s $100 you could otherwise spend. (As a shareholder, take that $100 and multiply it by, say, half of a bank’s retail customer relationships and you see that it’s real money.)
Note that the above examples didn’t use any higher math, multiplication and division. You can do that, too, and it might just lead you to change some of your habits. With regard to the new bank fees for a checking account, I firmly believe that they will push a number of people “over the edge” toward more fiscal prudence. That would be a good thing. Unfortunately, the people who will be most hurt by these fees will be the ones least able to afford them because amassing the minimum account size is beyond their fiscal reach or, worse, beyond their emotional reach.