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During the “Great Recession” of 2007 to 2009, many Americans turned a critical eye on large financial conglomerates. The collapse of Bear Stearns, Lehman Brothers and others triggered a bailout of institutions considered “too big to fail,” raising many questions about how the nation’s largest banks should be allowed to operate.
In response to these events, legislators passed the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank sought to protect the stability of the financial services industry and American consumers mainly by putting new regulations on banks.
The bill’s broad mandates cover many kinds of financial instruments and activities, including the fees banks charge both merchants and consumers. The financial industry’s efforts to stabilize revenue under the law have substantially affected consumer financial products like checking accounts.
Why Dodd-Frank matters
A few aspects of Dodd-Frank and related regulations have had the greatest effect on “retail” bank accounts, or those available to individuals and families in the U.S.:
Separate from Dodd-Frank but in the same spirit, in 2010 the Fed began to enforce compliance with a 2009 rule that prohibits banks from automatically enrolling new checking-account customers in ATM and debit-card overdraft coverage programs, which can be difficult to understand and very costly to account holders.
The American Bankers Association also cites the significant hard costs of compliance with the full scope of Dodd-Frank. Some of these can be attributed to new overdraft disclosure requirements and related operational and legal expenses.
The Consumer Financial Protection Bureau (CFPB), created by Dodd-Frank, has conducted extensive research on overdraft and insufficient-funds charges and may issue new regulations this year and beyond. It has also begun to assert its authority on aspects of consumer finance as diverse as credit card agreements, mortgage counseling and credit reporting.
These changes put tens of billions of dollars in consumer-related fee income at risk across the banking industry. In 2013, overdraft fees alone were estimated at nearly $32 billion by Moebs Services, a research firm in Lake Bluff, Illinois.
How Dodd-Frank affects checking accounts
Banks’ retail units have responded to this new regulatory environment by searching for new sources of revenue. The story has unfolded in several stages:
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1. Cutting down on fee-free checking
In 2010 and 2011, big banks began by making big changes to their “fee-free” checking accounts, or those without monthly maintenance fees. In most cases, this meant adding or stiffening criteria that customers had to meet to qualify.
These criteria included minimum balance or usage requirements, like the number of debit-card payments or direct deposits per month. At the four largest retail banks in the U.S., this new fee averaged a little less than $7 per month initially.
2. Raising monthly and overdraft fee revenue
Since those early responses to Dodd-Frank, more banks have raised monthly fees. Three out of the four now charge $12 a month for most accounts that don’t qualify for waivers. What’s worse, in some cases, banks haven’t adequately communicated or honored the qualification criteria. In 2014, for example, the consumer agency ordered M&T Bank in Buffalo, New York, to pay about $3 million in refunds and penalties for failing to fully disclose eligibility requirements for waivers.
Banks also raised overdraft fees to compensate for the loss of automatic enrollments into their overdraft-protection programs. This move proved especially lucrative in 2012, when a slow economic recovery saw more enrolled customers relying on overdraft services more often. Overall, overdraft volume rose after the initial drop the new regulations had caused, helping keep financial services providers’ income from overdraft fees steady.
Overdraft fee increases also work well for providers because of the limitations of the Fed’s rule on auto-enrollment. In particular, even customers who haven’t opted in to overdraft services can still face charges, when checks or some electronic transfers push their balances below zero. So those “opted-out” customers still pay more overdraft and insufficient-funds fees than any other kind of checking-account charge.
Industrywide, overdraft revenue has been relatively stable since 2012, in part because of these fee increases.
3. Imposing new fees
From late 2011 through 2012, as the first years of post-Dodd-Frank revenue data became available, banks looked for new ways to safeguard their income from consumer fee restraints.
The range of fees levied on checking accounts has always been broad, but some of the new ones banks dreamed up in this period seemed problematically arbitrary to consumers. Most notoriously, Bank of America announced and then rescinded a proposed $5 monthly fee for debit card usage. And many of the largest banks instituted fees for closing new accounts within a certain timeframe, typically 120 days. Most of those were also called off by late 2013.
Retail banking’s future
The average consumer now pays more than $118 a year in checking fees with those enrolled in overdraft services paying $349. To be fair, big banks are constantly tweaking their programs, looking for the sweet spot between protecting fee income and providing a competitive customer experience, lest they lose their checking customers to more consumer-friendly options.
These experiments take many forms, even within the narrow arena of fee revenue. For example, many banks have begun eliminating overdraft fees for negative balances smaller than $5. And banks like US Bank and Key Bank have begun charging 50-cent fees for mobile check deposits, something many banks provide for free. However, Regions Bank, which collects the same 50-cent charge, also offers to make funds available more quickly, for a higher fee.
This may be the best version of retail banking’s future: fees, but not without some incentives for consumers who pay them. With strong pressure from start-ups and other alternatives, banks will have to adapt to preserve their economic value and their value to customers.
Infographic by Dora Pintek.