Understanding Bank Fees
Understanding bank fees is crucial for managing personal finances effectively, as these charges can significantly impact a customer's budget. Banks impose various fees for services like maintaining accounts, processing transactions, and providing statements, with costs varying widely based on account types and individual bank policies. Some services may be offered for free or at a reduced rate if certain conditions are met, such as maintaining a minimum balance. The evolution of banking fees has been influenced by historical events, including the financial crisis of 2008, which prompted regulatory changes intended to protect consumers and ensure clearer fee disclosures. Common fees include maintenance fees, excess withdrawal fees, overdraft fees, and ATM fees, among others, each designed to generate revenue for banks. To mitigate these costs, customers are encouraged to compare account offerings, understand specific fee structures, and choose banks that align with their financial habits. Additionally, being proactive in communication with bank representatives may lead to waived fees in certain circumstances. Overall, awareness of bank fees empowers consumers to make informed decisions about their banking choices.
Subject Terms
Understanding Bank Fees
Bank fees are the charges to a customer for services provided by a bank. Services include maintaining a checking or savings account, providing a paper bank statement, processing transactions such as deposits and withdrawals, and transferring funds. Banks generally offer a variety of accounts with different terms and fees. Based on the account type, some services may be provided at no cost, while others are provided for a fee. Accounts that meet certain qualifications may have fees for some services waived. For example, a bank may waive the account maintenance fee for customers who maintain a minimum average daily balance in their account. Similarly, banks may allow a certain number of transactions at no cost for an account while charging a fee for transactions above that limit.
Banks charge fees to earn revenue. A portion of a bank’s revenue comes from the fees it charges its customers. The remainder comes from lending money to customers and investments. Many bank fees are tailored by the profitability of the account type. A free checking account with no minimum balance requirement and unlimited transactions is less profitable than one with a required high minimum balance, a percentage of which can be used to provide interest-bearing loans that earn revenue for the bank. Thus, the customer with a free checking account is more likely to incur a fee for a service that would be waived with a more profitable account.
Brief History
The first free checking account was offered in 1982 by a team at a direct mail agency in Lincoln, Nebraska. Since then, many banks have provided free checking accounts to customers who maintained a low monthly balance, typically ranging between $100 and $500. Some banks have even offered free checking accounts to customers with no minimum balance requirement. While it costs banks to maintain accounts, they have been willing to maintain these free accounts in order to attract customers whom they hoped would use other services for which the bank could charge. One of the extra services many customers used was automated teller machines (ATMs). ATMs were first introduced in the 1970s and proliferated during the early 2000s. In the 2020s, such machines were still in use. Accordingly, banks’ revenues from debit card fees went up over this period as well.
Following the financial crisis of 2008, new regulations hit the banking industry. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Its purpose is to protect consumers from abusive financial practices by banks and other financial institutions. It created the Consumer Financial Protection Bureau (CFPB) to create new rules and enforce federal regulations for banks. In 2011, the Durbin Amendment to the Dodd-Frank Act capped the amount that banks could charge retailers for processing debit card purchases.
The Federal Reserve also passed a series of regulations requiring banks to disclose fees for services. The CFPB enacted a regulation preventing banks from automatically enrolling customers in overdraft programs that allowed them to charge high fees for overdrafts. Customers now have to opt in to such programs.
The financial crisis of 2008 not only led to new federal regulations, it led to an onslaught of new fees and higher fees for bank customers. The resulting financial crisis resulted in lower interest rates, lower rates of savings, and fewer loans. Thus, banks had to seek out other sources of revenue, and banks added fees for previously free services and raised the fees for other services.
In 2011, senators Dick Durbin (Democrat of Illinois) and Jack Reed (Democrat of Rhode Island) proposed new regulations requiring banks to fully disclose all terms and fees in simple, easy-to-understand language on their websites. The Pew Charitable Trusts also took up the cause and urged the CFPB to enact new regulations for bank disclosure policies and other bank rules. While no such regulations have been passed, several banks have responded to pressure for better disclosure by posting easier-to-understand information about their bank fees on their websites. At the same time, consumer advocates continue to push for more regulations that protect consumers from being caught unawares and charged excessive bank fees.
In 2018, president Donald Trump rolled back much of the Dodd-Frank Reforms with the Economic Growth, Regulatory Relief, and Consumer Protection Act. The bill essentially eased regulatory burdens on smaller banks, which in turn led to some banks lowering fees.
In 2024, the Consumer Financial Protection Bureau closed a loophole on overdraft fees that banks were taking advantange of and overcharging for, making it more difficult, specifically for larger banks, to charge such fees without disclosure of interest rates to consumers.
Overview
Following are brief descriptions of the most common types of bank fees at large multinational banks in 2015. Because there is no uniformity in bank fees, the range of actual fees can vary significantly and will depend on the type of bank and the account type.
Maintenance fees, or monthly and annual service fees, are the fees a bank charges for maintaining a customer’s account. Once free, or offered at a low cost, many banks charge a fee every month that can vary widely among banks.
An opening fee is a charge to open an account. It is most commonly used for noninterest bearing checking accounts.
Some banks have fees to close an account, particularly if the account is closed within a certain number of days after it has been opened or if it is closed due to failure to meet the account terms, such as a set number of direct deposits every month.
An excess withdrawal fee is a fee for making more than a certain number of withdrawals or transfers from a savings account during a statement cycle. This fee is often charged per occurrence.
A monthly statement fee may be charged when a bank provides a hard or paper copy of the account’s statement every month. Some banks offer a discount for customers who waive the monthly statements or who opt to do their banking electronically.
Some banks charge fees for images of canceled checks and deposit slips. These fees are typically charged monthly, and banks may charge significantly more for images from archived statements rather than the current or recent monthly statements.
Overdraft fees are charges for making a transaction for an amount larger than what is available in the account. This includes checks, debit card transactions, and automatic bill payments. Banks often charge for each overdraft occurrence, but they also have flexibility in how they process overdrafts. An account holder may be hit with unexpected fees if the banks process a higher transaction that depletes an account’s funds before a smaller transaction. For example, a person may use a debit card for a $10 transaction, then use it again for a $500 transaction several hours later. If the account has $499 in it at the time of the first transaction, the $10 transaction should clear without incurring an overdraft fee, but if the bank processes the $500 transaction first, both transactions will incur an overdraft fee.
An insufficient funds fee is similar to an overdraft fee, but it refers to a check written for an amount that is larger than what is in the account. Banks charge for each occurrence. Additional fees may be charged for exceeding a certain number of overdrafts a day or maintaining a negative balance for five days.
ATM fees are charges for using a nonbank ATM. These fees vary and may be charged by both the account holder’s bank and the ATM bank or network. However, some banks offer ATM fee waiving regardless of the bank the ATM belongs to.
Banks will often change a fee for ATM or debit card replacement. The fees vary and depend on how fast the replacement card is provided.
A transfer-fund fee is charged for transferring funds between accounts to prevent overdrawing one account.
A stop-payment fee is a fee for requesting an order to stop the processing of a check or transaction that has not yet cleared the bank.
Best Practices to Limit Fees
Selecting the bank and account type that best meets one’s financial habits and needs can help to avoid costly bank fees. For example, a person who wants the convenience of accessing cash any time of day or night can avoid excessive fees by selecting a large national bank with numerous bank ATMs and no fees for using them. Alternatively, they might choose a bank that pays back any ATM fees, regardless of which bank the ATM belongs to. Similarly, a person who uses a credit card instead of cash for most purchases may be more concerned with features such as the minimum balance requirement for interest-bearing checking accounts and may choose to bank at a local community bank that offers a higher interest rate but fewer conveniences such as ATMs.
Fees and account terms vary widely between banks, so it helps to comparison shop and carefully examine several banks’ fee services schedule and account terms. An attractive-sounding account may have high unexpected fees, such as a fee to open or close the account, or restrictions on the number of transactions allowed without incurring a fee. For example, an account with a high minimum daily balance prevents the account holder from accessing all the funds in the account. For consumers who live paycheck-to-paycheck or who have regular cash-flow problems, a free checking account with a high minimum balance may cost more in overdraft fees than a checking account with a low minimum balance requirement and a monthly maintenance fee of $5.
If unexpected fees are incurred for a one-time service, such as a stop-payment fee or transfer fee, it helps to ask a customer service representative or personal banker to waive the fee. Some banks will waive a fee for the first occurrence for customers with profitable accounts rather than risk losing the customer’s business.
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