LAKE FOREST, Ill.—Is credit union free checking finally on its way out?
New research from Moebs $ervices indicates that may be the case, as the company’s latest checking study shows that for the first time credit union free checking numbers are declining.
For years, since the uproar around Bank of America’s debit card fee helped to start the Bank Transfer Day Movement that has sent millions of consumers to CUs, credit unions have held the line with free checking as big banks jettisoned the service in favor of relationship pricing.
“Credit unions are starting to follow the checking trend established by banks and thrifts: eliminating the free checking account,” said Michael Moebs, CEO and economist of Moebs $ervices. “Free checking usage is at its lowest level since 2000.”
Moebs explained that free checking usage is down 11.1% since last year; the largest drop since 2010 at the height of the Great Recession and the passage of the Dodd-Frank Act.
“With both the banks and thrifts reducing free checking usage in the past decade, the credit unions have stayed with it. However, in the past several years, the credit unions are beginning to start their decline,” said Moebs, who noted that CU free checking offerings have reduced by 5.9% since 2014.
Can't Hold The Line
Michael Moebs, Moebs $ervices
Moebs explained that in recent years credit unions have remained statistically flat with free checking offerings. But following 2016, it’s clear that credit unions cannot afford to hold the line on free checking, added Moebs, saying that lower overdraft and interchange revenue are forcing them to cut back on the free offerings. A recent CUToday.info report also revealed CU dependence on fee income.
Moebs pointed out that the Wall Street Banks have almost eliminated free checking entirely.
“The three big players, Wells Fargo, Chase, Bank of America, have all dropped free checking,” said Moebs. “The key driver behind the elimination of free checking is the high cost of servicing the checking account. The impact of checking cost is why CUs are moving from free checking.”
The Moebs Study on Checking Costs shows large banks, like Wells Fargo, have a high cost for operating a consumer checking account of about $400 annually in contrast to a community bank or credit union at $300 yearly cost or less.
“For a large bank to break even on a free checking account, they would need to collect considerable fees from the consumer incurring fees like overdrafts or collect interchange from high monthly usage of debit cards,” said Moebs.
Free Checking Big In The East
The days when a subset of checking account holders decreased the cost of checking for the entire portfolio are in the past, asserted Moebs.
“At many banks and some credit unions, and certainly for the large banks, the consumer will not meet the usage requirements to generate enough revenue to break even with the costs of the checking account,” stated Moebs. “So, the decision must be made to offer free checking as a loss leader, or eliminate it entirely. In the Wells Fargo case, eliminating the free checking account was a prudent decision. The free checking dream is gone.”
Free checking is still heavily offered in the East, where in cities such as Boston and Baltimore nearly three out of every four financial institutions offer a free checking account. In contrast, in the South fewer than half offer a free checking account. And in cities such as Miami, fewer than one of every four financial institutions offer it, the study shows.
“There is also a clear distinction between suburbs and large cities. In the suburbs, nearly 60% of financial institutions offer free checking, when only about 45% offer it in large cities,” explained Moebs.
“Even though free checking is declining at credit unions, still about three out of four CUs offer the service.”
A 'Glorious Run'
The Moebs study, however, indicates that free checking will always be around.
“Any financial institution that has good control of its expenses and operating transaction accounts will still have the ability to offer a free checking account,” said Moebs. “Keeping expenses down will allow fees to offset free checking operating cost. Otherwise, free checking was a glorious run.”