Plans by major banks to largely eliminate free checking accounts could push millions of American households outside of the traditional banking system, bankers and experts warn.
To recoup lost revenue from sweeping new bank regulations, the nation's largest banks, including Wells Fargo & Co., Bank of America, Citigroup and J.P. Morgan Chase, have introduced monthly fees of $5 to $25 on checking accounts that previously had none. Smaller banks are expected to follow suit -- effectively ending the era of "free checking" that began in the early 1990s.
The result: Many people who were accustomed to getting bank services for free are now asking themselves if it's worth paying a monthly fee for a checking account.
J.P. Morgan chief executive James Dimon has predicted that up to 5 percent of banking customers may be pushed out of the banking system as a result of higher fees. If this occurred, it would increase the ranks of unbanked Americans from 17 million to nearly 23 million people, based on government data.
Such an outcome would deal a blow to efforts by federal regulators and community activists to reach out to the unbanked. Over the past two decades, the Federal Reserve, U.S. Treasury and Federal Deposit Insurance Corp. have launched initiatives aimed at getting Americans, particularly minorities and low-income households, to feel more comfortable with banks, and to discourage them from turning to high-cost alternatives such as check cashing outlets.
The FDIC estimates that 7.7 percent of U.S. households are unbanked, though the numbers vary dramatically by region.
Some consumer advocates say predictions of a large exodus from the banking sector are overblown, and may be part of a lobbying effort by the banking industry to stir up opposition to government regulation.
The nation's large banks and their lobbyists have recently launched an all-out assault on Congress to weaken or repeal a new Federal Reserve rule that would reduce by 80 percent or more the amount of so-called "interchange" fees that banks collect from retailers each time a consumer swipes a debit card. For the banks, an estimated $48 billion in annual fee income is at stake.
The reasons households go without bank accounts are complex and have always been about more than just fees, bank regulatory experts say. More important than fees are factors such as household income, check usage and comfort level with banking.
Richard Bove, a bank analyst with Rochdale Securities in Florida, estimates that 15 to 20 percent of Americans with bank accounts will close them over the coming year. "When Americans finally come to grip with the full impact of these new fees, millions will head for the exits," Bove said.
Already, the prepaid debit-card industry is seizing the opportunity to tout itself as a consumer-friendly alternative to bank accounts.
The cards, which often are associated with celebrities and sold in racks in retail stores, aren't linked to bank accounts. However, because they can be loaded and reloaded with cash payments, they have emerged as a popular way for people to manage their money without bank accounts.
Payments with prepaid cards are growing at more than 20 percent a year, reaching a total of 6 billion transactions in 2009, and are growing faster than any other payment method, according to the Federal Reserve.
However, prepaid cards lack many of the protections offered by bank accounts, and often include multiple fees.
Consumer advocates have likened the explosive growth in the prepaid debit-card industry to the boom in high-priced check cashing outlets in the late 1990s. Both industries benefited from a lack of regulation while charging hidden fees, advocates argue.
"People need to be careful," said Gail Hillebrand, a senior attorney at the Consumers Union in San Francisco. "What can seem like a convenient alternative (to a bank account) can really cost you."