By Dan Horn
The Cincinnati Enquirer
CINCINNATI - Bank customers may soon see their free checking accounts go the way of free toasters.
PNC Bank this week joined a growing list of banks that have ended - or soon will end - the practice of giving any customer who walks through the door a free checking account, no strings attached.
Like the toasters that banks handed out decades ago to new customers, free checking is now seen by many in the industry as an unnecessary perk and a luxury they no longer can afford.
Free checking was so popular four years ago that 76 percent of banks offered it, according to Bankrate.com. Today, 39 percent do.
The three biggest banks in Greater Cincinnati and Northern Kentucky - Fifth Third Bank, U.S. Bank and PNC - all now attach fees and restrictions to checking accounts. Analysts expect more to join them, especially among the nation's large and mid-sized banks.
They say free checking is a casualty of new government regulations and changing business models that left banks scrambling for additional fees. The new rules cut ATM fees by about half and also limited the ability of banks to collect overdraft fees.
"That was the revenue that allowed them to provide checking for free," said Greg McBride, a financial analyst at Bankrate.com. "It's like if the government said you could only charge so much for a burger, the price of soda and fries would go up."
The trend also suggests big banks are changing tactics when it comes to attracting customers who do little business with them beyond a small checking account.
Bankers and analysts have estimated a checking account costs a bank $175 or more per year to maintain, because of operational expenses and the cost of catching and correcting customer errors.
Many have decided those customers aren't worth keeping around.
"The big banks are definitely getting out of it," said Mike Moebs, CEO of Moebs Services, an economic services firm in Illinois. "The key element would be costs."
He said big banks feel the pinch more because, in the case of checking accounts, volume is not an advantage. Checking accounts often are a net loser, he said. And the more accounts a bank has, the more they lose.
So banks like PNC are now using checking accounts to encourage customers to do more business with them. They'll let customers keep free checking, but only if they also keep a minimum balance, get a car loan, set up a retirement account or finance their mortgage with the bank - in other words, stuff that's more profitable for the financial institution.
If customers won't do any of those things, they'll have to pay to keep their checking account.
"We really are trying to encourage more customers to make us their primary bank," said Pat McMahon, PNC's spokesman. "The more a customer banks with PNC, the more perks and rewards they get."
McMahon said about 90 percent of PNC's current checking account customers already do just that and won't be affected by the changes coming next year.
Moebs said that's probably true for most banks that have done away with no-strings-attached free checking. He said the new model is called "relationship pricing," and the goal is to hang on to profitable customers and shed the rest.
But the move away from no-strings free checking doesn't mean it's dead. Most small banks and credit unions still offer it and probably will for the foreseeable future, Moebs said.
He said his research suggests 15 million to 24 million checking account customers have moved in the past few years to smaller banks and credit unions, where the business model is focused more on families of modest means and limited portfolios.
"We don't have the large, macro issues the big banks do," said Mark Exterkamp, vice president of retail banking at Bank of Kentucky. "We're a community bank. We want to develop relationships."
A few larger banks in the area also are holding out. Huntington Bank, the region's fourth-largest bank by deposits, still offers free checking, and First Financial, the fifth largest, offers it as long as customers agree to get their statement sent to them electronically.
"It's about what customers want," said Brent Wilder, spokesman for Huntington Bank. "And customers still want free checking."