Smaller Banks Use Free Checking To Lure Customers

Big banks are beginning to make good on their threat to charge fees for everyday checking accounts. But most banks aren't big banks, and community institutions are hanging on to free checking as long as they can in the hopes of luring away some of the big banks' disgruntled customers.

The larger banks are now enacting what customers like James Miller of Nashville have heard was on the horizon for a year or more: Your free checking account is about to cost you.

The research firm Moebs Services found that two-thirds of the country's largest banks no longer offer free checking.

"[You] finally just get to the point where it's like, yeah, it's only $3 a month, but jeez freaking Louise, it's $3 a month," Miller says. "Every couple of years you're changing something and taking stuff away."

An Opportunity To Draw In Customers

Miller, a musician and graphic designer, marched his business from Wells Fargo to a community bank across the street that still offers free checking accounts.

Smaller institutions see a window of opportunity with people like Miller. Tennessee-based Southeast Financial Credit Union is putting up billboards and sending out letters that proclaim: "Free checking is alive and well."

"This is when it's happening," says Lisa Reitmeyer, vice president of marketing for the credit union. "This is when it's important and a hot issue to people, so this is when we need to let people know. Before, everybody had free checking."

Tim Amos, with the Tennessee Bankers Association, says that for years, debit card fees charged to merchants paid the way for checking accounts.

"It may be free to the customer, but it's not free to the bank that offers the service," Amos says. "Someone is paying for the service, and always has been."

But the recently passed financial reform bill cuts those debit card fees by half starting Oct. 1, at least for the big banks.

"It only applies, though, to banks with over $10 billion in assets, which is certainly all of the larger banks, but it doesn't apply to those banks under $10 billion in assets, which is the vast majority of banks," Amos says.

Holding On To A Smaller Consumer Base

Maintaining higher merchant fees for the time being helps community banks keep free checking around, Amos explains. But in some ways, they can't afford the risk of raising fees like big banks can. Southeast Financial executive John Jacoway says it would be much harder to recover if customers leave in droves.

"We're not able to go out and get any person walking down the street to become a member of our institution," Jacoway says. "We're not on every corner across the nation. So each person, each member, if you will, is much more important."

Sam Allen of Renasant Bank in Mississippi says that if community bankers can steal some unhappy customers from larger institutions, they can make free checking accounts work. Renasant Bank has been promoting its no-charge checking accounts.

"By generating more good, core checking accounts, that's how we can generate additional fees for the bank," Allen says.

A survey by Bankrate.com shows that most Americans are willing to walk over new fees. Some will take their money to community banks; others are going to extremes.

Waiting at a Nashville bus stop, Karen Rowlette says she scrapped Bank of America, closed all of her checking accounts and now has her paycheck deposited to a prepaid Walmart card.

"In today's recession, every little bit counts," she says.

With all the new nickel-and-diming, Rowlette says cash might even make a comeback.