Checking out Checking Accounts

Monday 04/14/14

     Last week the markets continued to slip lower with momentum and growth stocks leading the charge. This week's post will be short and sweet. I want to discuss something that may seem like a minor inconvenience, but could actually be hurting growth.

     This may seem like an eternity ago, but there was once a time when you could go into a major bank and open a free checking account. By free, I mean that you could have a checking account, online banking, a debit card, checks and money orders without paying a monthly service fee. Several years ago the major banks changed this policy all at about the same time. Currently the three largest banks, Bank of America, JP Morgan Chase, and Wells Fargo, do not offer a free checking account. All three of these banks offer a checking account that starts with several fees, but provides options to waive them. The less money that you have, the more likely you are to be charged a fee. The chart on the right shows the requirements and fees for a basic checking account at three largest banks.

     The traditional bank model is to take in deposits from customers and use that money to make loans. The new banking model is to charge fees. This is clearly better for the banks who can collect huge fees with less risk. Imagine that you are a low-income individual working a full-time job that doesn't offer direct deposit. Now let's say that you work 40 hours a week at $15 per hour (more than double minimum wage). You pay the average U.S. rent of $1,121.16 (end of Q3 2013). The average amount spent on food per month in the U.S. is about $294, but times are tight so you budget down to $200 per month. Now you have to pay your electricity bill $100, city bill $50, phone bill $50, car loan $100, gas $50 and your student loans $100. You try to be frugal and forgo any sort of entertainment expenses. This means you have about $80 leftover to stash in your checking account, after all there is no point in having a savings account that pays .01% interest (and will also probably end up charging you a fee). You already had $1,000 saved up in your checking account so you now have $1080. This of course is not enough to meet the minimum balance requirement of $1500 so you get hit with a $10 fee. This may not seem like a lot, but it adds up pretty fast.

     If you were to get a loan from a bank, Usury laws would protect you from being gouged by the bank. However, when you deposit money in a bank account you are lending money to the bank so usury laws don't apply, even though the fees in proportion to the money deposited vastly exceed most state usury laws. Clearly the less wealth you have, the more you are charged to have a bank account and the more it will impact you proportionally. This is concerning from a policy standpoint because lower income individuals are more likely to spend extra money.

     I have a question? Are increased checking account fees inflationary or deflationary? At first glance it would seem that they are inflationary. Basic checking accounts used to be free, then they were $3 per month, then $6, now $10. However, there is another way to look at it. When a bank creates a loan it increases the money supply, when the loan is repaid the money supply shrinks. Therefore, if a bank charges a fee wouldn't that shrink the money supply?
Index Closing Price Last Week YTD
SPY (S&P 500 ETF) 181.51 -2.36% -0.95%
IWM (Russell 2000 ETF) 110.41 -3.11% -4.02%
QQQ (Nasdaq 100 ETF) 84.11 -2.02% -3.63%

Checking Account Comparison

Checking accounts and fees vary by state, this is not intended to be used as a tool to determine which checking account to use and is not guaranteed to be accurate. For more details please contact each bank individually.