The Wall Street Journal

Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans.

Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.

Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts.

It’s an important debate and a key lesson in economics. Banks aren’t going to willingly make less money, so if the feds restrict overdraft fees, the affected banks will then kill free checking to make up the difference. But what happens when lenders can’t make it up elsewhere? If, say, there’s a limit on interest rates, lenders will simply stop offering that credit option rather than taking the loss. It’s already happening: Cap interest rates on short-term loans, and the government is effectively taking away the highest-risk consumers’ access to credit.

In an update on the old saying, the road to (financial) hell is paved with good intentions — and unintended consequences.

Recognizing an opportunity, Austin-based Probity Financial Services is now offering a bank account with no overdraft fees (up to $500 in non-sufficient funds) and zero out-of-network ATM surcharges.

The bank — whose CEO calls it “kind of like Netflix for your checking account” — charges $19.95 per month for the convenience. But if you are hapless with balancing your checkbook, it might just be a bargain.

Probity is just one of several options for people living close to the edge. It’s no wonder that such transparency is becoming attractive to more people — even if those choices can cost a little more up front.

The Washington Post yesterday reported on a topic we’ve covered in depth: increased banking fees.

Customers are paying more to maintain a checking account and withdraw cash from an out-of-system ATM, and when they bounce a check. To make up for declining revenue, many banks are boosting fees and are requiring higher minimum balances for many accounts.

The institutions also have made it easier for customers to spend more than is in their accounts — and then hit them with substantial fees, a practice so vexing to consumer advocates that the Federal Reserve is thinking of regulating it.

Bank revenue has plummeted on the back of foreclosures and rising credit card delinquencies. Now Congress has passed a law cracking down on arbitrary and excessive credit card fees. So the banks have been fighting back.

And the way banks and credit unions “fight back” is by raising fees on customers, particularly for easily-avoidable errors such as ATM and overdraft charges:

Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10. On top of that, it began charging a one-time fee of $35 if the account remains in the negative for more than five days.

[...]

In a study of fees last year, Bankrate.com found that the average bounced check fee rose 2.5 percent from 2007 to nearly $30. The average ATM surcharge in 2008 was up more than 10 percent to almost $2.

Of course, there are a few steps you can take to avoid these sorts of problems:

• Make sure your checkbook is balanced and you know how much money is in your checking account.
• There’s no reason (other than laziness) that you should have to use another bank’s ATM most of the time.
• If your brick-and-mortar bank requires a high minimum balance in order to qualify for free checking, consider switching to an online bank with free no-minimum checking accounts such as Charles Schwab or E*Trade.

Our friends at Wallet Pop have some good old-fashioned advice that–hopefully–even the least financially savvy consumers know to follow: balance your checkbook.

While pulling out the pen and paper may seem inconvenient, it’s the best way to avoid overdraft charges and insufficient funds fees. Wallet Pop notes:

Obviously, that’s harder to do than you’d think. You stand at the grocery and write a check instead of swipe your plastic, and people will glare at you. Slow things down even more by writing in the registry, and you’re going to really get glared at … We’ve actually made it so that it’s almost socially unacceptable to keep track of your finances — at least if it’s done in a way that inconveniences other shoppers for a few seconds.

The hassle of balancing your checkbook is worth the piece of mind that comes with being in control of your own money. Sometimes the easiest tasks are the ones that are overlooked, but getting a headstart on consistently managing your finances is a surefire way to avoid unecessary expenses like overdraft fees or interest charges. (Online resources like Mint.com or your bank website can be very elpful.)

Bank of America just announced they’re raising their fees on most checking accounts in June, and as a customer I was surprised to discover that I could be charged $9.95 per month. According to their website, for “Standard Checking” accounts:

Starting June 5, 2009*, the Monthly Service Charge will be $9.95. This fee will no longer be discounted with direct deposit.
How to help prevent this charge:

• Maintain a minimum daily balance of $1,500.
• Maintain a combined balance of $5000 from linked savings or investment accounts.

I keep my money in a high-yield savings account to maximize my interest income, but to avoid this new fee I’d have to keep at least $1,500 in a checking account earning 0% APY. Not necessarily a huge problem, but definitely annoying.  And not everybody has the kind of savings I do.  For someone just getting out of school or making a big move, maintaining $1,500 is a tall order.

Even worse, in my opinion, is the fact that BofA is adding a new “extended overdraft fee” for overdrafts of more than 5 days.

As of June 5th, 2009, we will charge one $35 Extended Overdrawn Balance Charge for accounts overdrawn for 5 consecutive business days. This charge is in addition to applicable Overdraft Item Fees and NSF: Returned Item Fees.

So if someone spends $5 more than they have in their account, they are already charged a $35 fee. But now if they don’t repay the bank within 5 days, they’re charged another $35. So a $5 overdraft for 5 days would cost $70! I think that may actually be the worst deal I’ve ever seen, and I’ve shopped at Whole Foods.

That being said, I like the convenience of ubiquitous Bank of America ATMs, so for me, it may still be worth keeping my account (and maintaining a balance of $1,500 to avoid the monthly fee). But whatever bank you use, make sure to find out what fees they might charge you.

This is hardly unusual behavior. Banks and credit unions make quite a bit of money through fees, so for consumers there are lots of policies and penalties to keep track of. Here are just a few examples:

• You get hit with an overdraft fee for every transaction that overdraws the account. If you use your debit card multiple times and your checking account doesn’t have enough funds, each new charge incurs an overdraft fee. Since, for example, Bank of America allows you to overdraw your account ten times per day, you could be charged up to $390 in fees! Only at that point will a new debit card transaction be declined.
• When processing multiple checks in a day, most banks and credit unions will process the checks in order of descending value, a strategy that maximizes the number of overdraft fees they can charge. If three checks are processed, for $10, $15, and $100, and you only have $90 in your account, you’ll get dinged for three separate overdraft fees instead of just one.
• Overdraft “protection” services-where your bank agrees to draw from your savings account or credit card if your checking account runs dry-often carry their own associated fees. At Bank of America, for instance, there is a $10 overdraft protection fee to transfer the money from a savings account. And should you use your credit card as overdraft protection, the interest rate you’re charged is different than for a regular purchase. In the case of my own Bank of America credit card, the cash advance APR is 19.24%, almost three times more than the usual purchase APR of 7.24%.
• If you withdraw more money from an ATM than you have in your checking account, most (81%) banks and credit unions won’t warn you; they’ll just give you the cash and charge you $30 or $40 for the privilege.

As banks and credit unions continue to feel the effects of the economic crisis, their fees and policies are likely to continue trying to nickel and dime customers. That’s why it’s so important to know the details of your bank’s policies and have appropriate alerts set up for your accounts (through services like Mint.com or your bank’s website) so that you don’t accidentally incur any of their skyrocketing fees. As we’ve said before, “the best way to avoid these charges is to always know how much money you have in your bank account.”

An Econ4U survey showed that 50% of Americans admit to having overdrawn their checking account, even though (as frequent visitors already know) it is the most expensive form of short-term borrowing.

Update: Bank of America has “suspended” the overdraft fee increase.

Customers should still take the time to note their bank’s policy on overdrafts. Other banks, besides Bank of America, still reorder the fees. According to the FDIC, 81 percent of banks operating automated programs allow overdrafts to take place without alerting the customer. The APR on these overdrafts can be as high as 3520 percent (!), far more expensive than any other form of available short-term borrowing.