BofA’s Elimination of Free Checking: A Stroke of Genius

Bank of America announced that it will terminate its free checking option for low-balance customers. The decision caused glee among smaller banks and credit unions expecting to benefit from the change, and scorn from clueless politicians who seem to think that banks should just provide free money to everybody.

Andrei Cherny, CEO of startup bank Aspiration (see the News Not Noise post about them here) told pymnts.com:

“The [big banks] feel like they can just charge customers whatever they want because it’s too much of a hassle to switch banks. The problem with that thinking is that it is out-of-date – and customers have more choices than big banks think they do."

Bank of America's decision is a smart business decision. Cornerstone Advisors surveyed 2,015 US consumers between the ages of 21 and 72 who have a checking account and smartphone. We asked respondents two questions about their relationship with their primary FI:

  1. How many of your friends and family have you referred to your primary FI over the past 12 months?
  2. What other products have you added with your primary FI over the past 12 months?

The findings are clear: Compared to free checking account holders, a larger percentage of consumers with a fee-based checking account referred family/friends to their primary FI and grew their relationship by adding non-deposit products.

Among fee-based checking account holders, 58% referred friends/family, and 43% added non-deposit products. In contrast, among free checking account holders, 44% referred friends/family, and just 27% added non-deposit products.

Referral and Relationship Growth Behavior by Type of Account

 

Fee-Based Checking Account Holders

Free Checking Account Holders

Referred friends/family

58%

44%

Added non-deposit products

43%

27%

Source: Cornerstone Advisors survey of 2,015 U.S. consumers, Q3 2017

With the greater propensity for younger consumers to have fee-based checking accounts, is age driving the referral and relationship-expansion behavior? No. Across each generational segment, a larger percentage of fee-based checking account holders referred their family/friends than did free checking account holders.

Referral Behavior by Generation and Type of Account

 

Referred Family/Friends

 

Fee-Based Checking Account Holders

Free Checking Account Holders

Young Millennials

61%

57%

Old Millennials

76%

54%

Gen Xers

48%

43%

Boomers

37%

31%

Source: Cornerstone Advisors survey of 2,015 U.S. consumers, Q3 2017

This difference in behavior held true for adding non-deposit products, as well, particularly for the three younger generational segments.

Relationship Growth Behavior by Generation and Type of Account 

 

Added Non-Deposit Products

 

Fee-Based Checking Account Holders

Free Checking Account Holders

Young Millennials

42%

33%

Old Millennials

57%

41%

Gen Xers

39%

23%

Boomers

21%

19%

Source: Cornerstone Advisors survey of 2,015 U.S. consumers, Q3 2017

Bottom line: Why would a bank or credit union offer free checking? There are two good reasons: 1) Because it believes that fees other than monthly charges (e.g., penalties like NSF, or usage-based fees like interchange) will make the account profitable, or 2) Because it will provide a springboard for future business, or at least, a better springboard for more business than a fee-based account would.

Cornerstone's research disproves reason #2.

As for reason #1, BofA is likely betting that the future of interchange is not worth hanging its hat on. I think that's a good bet. And no FI should be betting that driving up NSF and overdraft fees is a good idea.

So, to all the FIs expecting to pick up new business with their free checking accounts, good luck. They will open new accounts. How profitable those accounts will be remains to be seen.

For more insights into this research, download the white paper Reinventing Checking Accounts here.

Ron Shevlin
Director of Research
Cornerstone Advisors

 

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