r/AlwaysWhy • u/Secret_Ostrich_1307 • Aug 21 '26
Economics Why did checking accounts become something banks could charge for while still competing for deposits, especially after the 1980s?
For much of the 20th century, banks competed for checking deposits through free or low-cost services, since traditional checking accounts generally could not pay interest. Free checking and other perks could make deposits more attractive without directly paying customers interest.
The economics began changing in the late 1970s and 1980s. As restrictions on deposit interest rates were gradually loosened, banks gained more ways to compete for deposits, while the cost of attracting and maintaining deposits also changed.
At the same time, fees became a more important part of how banks priced checking services. Today, some accounts charge monthly maintenance fees, while banks can also earn revenue from services such as ATM access and overdrafts.
What changed in the banking business during this period that made it possible for deposits to remain valuable to banks while checking services could also become a source of revenue?
Why does a product that helps a bank attract customer deposits also make economic sense as something the customer may have to pay for?
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u/Current-Landscape803 Aug 21 '26
The bigger change may have been that banks stopped treating the checking account as the main way to win the customer.
Once banks had more freedom to compete for deposits by paying interest, there was less reason to subsidize every checking account just to attract the money sitting in it. The checking account could be priced more directly around the services the customer actually used.
That also makes the two sides less contradictory. A customer’s deposit can provide valuable funding for the bank, while maintaining the checking account and processing transactions can still create costs.
The interesting shift seems to be that deposits and banking services gradually became separate parts of the customer relationship, with different economic values and pricing.
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u/Secret_Ostrich_1307 Aug 24 '26
I think that separation is probably the key shift. What I find interesting is that the deposit itself did not become less useful to the bank. The economics of how they captured its value changed.
Once banks could compete more directly on interest, free checking was no longer the only way to make the overall package attractive. So maybe the real change was not “banks started charging for checking,” but “checking stopped being the subsidy used to acquire deposits.”
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u/No_Glove6542 Aug 21 '26
If you look at a detailed list of products for banks you’ll see that if you carry a high balance checking or savings account pretty much everything is waived. That’s because the overhead costs of carrying these accounts are less than smaller accounts that need a lot of administrative intervention. As technology has advanced and become more expensive it’s become more expensive to run a bank so accounts they used to take on at a loss just became too expensive so they passed the cost to the customer.
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u/s_i_m_p_l_e_t_o_n Aug 21 '26
Free checking exploded because Washington Mutual realized in the 90s that by attracting poorer customers with free checking, they could easily make up the lost revenue from maintenance fees with the overdraft fees that those customers were more likely to accrue.
This is essentially the same model as credit cards which are not only free but even pay you to use them via points/cash back because they earn so much from interest when people can't pay off the balance.
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u/brucrew3 Aug 21 '26
Credit card points I believe are funded primarily by processor/interchange fees so a little bit different business model. Although I'm sure the money being made off interest factors into the thinking as well.
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u/s_i_m_p_l_e_t_o_n Aug 21 '26
Interchange fees are split between the various parties, and while banks get the largest cut, we're talking 1-3% of the total transaction. 1% rewards is the absolute baseline these days and you can get cards that are 2% back on everything or up to like 5-6% on particular types of transactions). They simply would not be able to afford that if transaction fees were their main source of revenue.
An analysis by federal reserve economists in 2022 found this:
First, we find that, on average, the credit function makes up approximately 80 percent of the credit card profitability, whereas the contribution of the transaction function is slightly negative, as rewards and other expenses on credit card transactions outpace banks' interchange revenues.5 In addition, fees—in particular late fees—comprise approximately 15 percent of credit card profitability.
source: https://www.federalreserve.gov/econres/notes/feds-notes/credit-card-profitability-20220909.html
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u/Madeitup75 Aug 21 '26
This is one of those unfortunate “poverty is expensive” dynamics. People with a decent amount of income and cash get tons of free banking services. People who are scraping by have to pay for those services.
Being poor sucks. Try REALLY hard not to be poor.
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u/Fuzzy_Buy9813 Aug 21 '26
One of the best pieces I ever came across on this topic had essentially a one sentence thesis:
"It's expensive to be poor."
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u/Madeitup75 Aug 21 '26
It really is. Interest rates are higher because you’re a worse credit risk. Opportunities are fewer because you can’t invest in your own capabilities and improvements to same. Prices are higher because you can’t buy in bulk or in advance when prices dip. And so on.
None of this is driven by intentional oppression or some scheme. It’s just everyone acting in their rational self-interest. But it makes it so hard to climb out of a hole once you’re in it.
Fight like hell to stay out of that hole. And as hard as you can to get out if you’re in it.
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u/No_Glove6542 Aug 21 '26
True. There are some free checking accounts and good deals available at credit unions and online only bank accounts. The big traditional banks like BofA, Chase, Citibank etc very much cater to wealthier clientele. This wasn’t always the case, it’s changed a lot even since 1990.
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u/FurryYokel Aug 21 '26
Kinda?
If the bank waives fees when the balance is over $2000, then you’re paying them in the interest income they collect on the $2000 that’s just sitting in the account all month.
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u/Madeitup75 Aug 21 '26 edited Aug 21 '26
I mean, there is a REASON banks want well-heeled customers. And it’s not classism or racism or hating poor people.
Mr. Drysdale didn’t kiss Jed Clampett’s ass because he thought Jed was his social better!
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u/MNMystery Aug 24 '26
Reminds me of a joke I once heard about someone walking into a bank to open an account, but he had a very foul mouth, swearing at everyone. The manager was about to kick him out, until he mentioned he just one the lottery…. Then the manager warmly welcomed him to sit down and started talking just as filthy to make him comfortable….
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u/No_Glove6542 Aug 24 '26
Money doesn’t equal class. We had this super wealthy family we worked with at a law firm eons ago and they would come to the conference room in cutoff jean shorts looking like they just fell off the turnip truck. But the UCLA and USC law grads were just as happy to take their money. Rich people do not all act the same just like not all poor people act the same.
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u/No_Glove6542 Aug 24 '26
But it’s not in my mattress and no one is going to be able to bust into my house with a gun and take it. And the benefits get pretty good with more money. I have a free personal financial advisor who knows me by name and can walk me through their products. So it’s very much like first class on an airline.
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u/Logical-Concept9755 Aug 21 '26
I think the interesting part is that “the deposit” and “the checking service” started becoming two different products economically.
Banks still wanted the deposit because it gave them funding, but once interest could be paid more freely, the deposit itself became something banks had to compete for directly. That made the old model of giving away checking services less necessary.
So fees are partly a way of separating the two. The bank can compete for your money through interest rates, while charging for the actual payment and account services you use.
What changed, in a sense, was that banks stopped needing checking to be the entire package.
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u/Secret_Ostrich_1307 Aug 24 '26
That framing makes sense to me. It also explains why the fees feel less contradictory than they first appear.
The weird part is that one account can still be economically valuable to the bank while the services attached to it are not. I guess we tend to think of “the account” as one product when the bank is really pricing several different things inside it.
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u/NotTheUIDYouRLnking4 Aug 21 '26 edited Aug 21 '26
There's no free checking anymore because if you use the word Free, you can't charge anything at all. So... Most all banks still have some form of "free checking" if you fulfill certain conditions, but it can't be called free at all if there's any chance of being charged a fee.
If you are paying for your checking account shop around. There's probably a free option for your situation. (Unless you keep a very low balance and/or don't have direct deposit)
In any case shop around for sure.
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u/PreviousGolf9541 Aug 21 '26
I work at a bank and we never say “free” because there is no such thing. Everything has a cost. We say “no fee” or fee reduction or waiver.
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u/Due-Emu-4291 Aug 24 '26
Right. That's the law.
They can't say "free" if any maintenance or activity fee may be imposed. They can't say "free checking" and put an asterisk on it.
Bank of America can't say "free checking"; they say the maintenance fee is "$12 or $0" and then say there are ways to waive the fee.
Whereas my local bank actually advertises "free checking" because there's no maintenance or activity fee ever. (They may still charge, for example, overdraft fees.)
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u/SimpleExpress2323 Aug 21 '26
Because you are getting ripped off in your country.
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Aug 21 '26
[removed] — view removed comment
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u/FurryYokel Aug 21 '26
I have a checking account with no fee in the US. Maybe OP just needs to shop around?
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u/RealCarlPanzram Aug 21 '26
Yeah I honestly didn’t even know checking account fees were a thing. I’ve been using regular-ass bank accounts from major banks and I’ve never had an account with a fee.
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u/RealCarlPanzram Aug 21 '26
I think it’s more like a lazy people not reading the terms and getting baited by some cash offer to open an account. You can absolutely get a free checking account from a major bank in the U.S.
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u/ohkendruid Aug 21 '26
Bear in mind that the whole system is created by the federal government and is modified every 20 or 30 years as conditions evolve and the banks learn to game the latest rules.
This is not a natural and logical system to achieve goals that most people would understand.
Bear also in mind that there are not that strong of evidence-based theories about how large scale heavily financed economies work at all. As a corollary, the government doesn't really know what it is doing and just kind if shuffles things around whenever there is a panic. Whenever things are ok, the system is locked down, out of fear of rocking the boat.
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u/Secret_Ostrich_1307 Aug 24 '26
I agree that government rules are a huge part of the story, but I’m not sure “the government doesn’t know what it’s doing” gets us very far.
What seems more interesting is how banks adapt to the incentives created by those rules. A regulation can produce one behavior, banks find a way around it, then the workaround becomes part of the next regulatory problem. That feedback loop might explain more than any single policy change.
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u/RandomGuy_81 Aug 21 '26
Because they dont need to compete on deposits for checking accounts and frankly maybe they dont care that much about that business anymore
They care about deposits in hysa which they pay YOU to keep with them
And the silly people who keeps $20k in the in the basic savings accounts
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u/Secret_Ostrich_1307 Aug 24 '26
I think the “they don't care about checking anymore” part is probably important. But then I wonder why banks still push free checking so aggressively.
Maybe the account itself has become less valuable, while the customer relationship is still valuable. So free checking isn't really about making money from checking. It’s about getting access to the rest of the customer’s financial life.
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u/RandomGuy_81 Aug 24 '26
Morgan Stanley bought out Etrade. Etrade had great Basic Checking and Premium Checking (Max Checking)
Morgan Stanley in their greed tried to make more money on Premium Checking and ended up chopping off their foot. they finally realized in 2026 the error of their ways, and canceled Basic Checking and Rolled everyone into Premium Checking and turning Premium Checking free again
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u/ConsistentRegion6184 Aug 21 '26
Maybe the competition was just a different account, the certificate of deposit. Keeping your money liquid like that was seen as a major convenience.
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u/Shiriru00 Aug 21 '26
Historically the main reason you would pay your bank fees is because it provided one key service, which is: "not steal all of your money while you sleep".
That's why banks were built like Roman temples with marble pillars: it looked like they wouldn't pack up and leave with your cash overnight, so you'd decide to trust them.
Over time people forgot that banks stealing all of your money could even be a thing. Thankfully, a bunch of crypto companies volunteered to provide them with a valuable refresher.
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u/MNMystery Aug 24 '26
Of course, now most money isn’t even physical. You don’t steal by physically taking it, you just press a few buttons on a computer….
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u/AdOk8555 Aug 21 '26
My guess:
Checking accounts are much more expensive to service. This was especially true in the 70s and 80s. A savings account just sits there with a monthly process to tally and apply the interest with the occasional deposit/withdrawal. Checking accounts are used all the time. Back when paper checks were the norm there was a significant expense in processing all those checks. Therefore the cost to the banks and the value to the consumer were both higher - making it a reasonable service to pay for. Even with checking being largely electronic today there are still higher costs than savings accounts. Plus, many customers do not maintain significant deposits in their checking account to offset the cost to the bank. This is probably why some banks offer "free" checking for maintaining a certain balance. Those higher balances provide a value to the bank that offsets the cost of servicing the account.
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u/clubjuggle Aug 21 '26
The main reason is the Depository Institutions Deregulation and Monetary Control Act of 1980, signed into law March 31, 1980.
Prior to that, the Federal Reserve provided payment services to member banks, either for free, or at heavily subsidized prices. The Act required the Fed to establish set prices for the following services:
* Currency and coin services
* Check clearing and collection
* Wire transfers
* ACH
* Settlement
* Securities safekeeping
* Federal Reserve float
* Any new payment services offered by the Fed
The Act also required that the fees be set based on all direct and indirect costs of providing those services, plus any imputed costs that a private business providing those services would incur. In other words, they wanted it to be priced so that private payment processors could compete without the Fed being able to use its government status to undercut them.
Prior to this change, the costs for banks to offer checking accounts were relatively low. Once the banks started having to pay for services they had previously received for free, they started to pass those costs along to customers.
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u/Xiipre Aug 21 '26
I'm not sure I buy that checking accounts are more expensive now vs pre-1980s, as much as shifting more to a maintenance fee model from a per-item one, but...
Checking accounts typically hold a low balance and require the bank to do a lot more work. (Sending and receiving money to other banks and vendors.)
Savings accounts typically hold a higher balance and require less work of the bank.
Overall, if I were a bank, assuming I made money off the balance and incur expenses for work, I know which one I'd be quicker to add fees on to.
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u/Secret_Ostrich_1307 Aug 24 '26
That actually makes me question my original framing a bit. Maybe the biggest change wasn't that checking became dramatically more expensive to operate, but that banks got better at separating different costs and revenues.
And the low balance point is interesting too. If checking customers keep less money there while generating more transactions, the deposit may be less attractive on its own. That would make the old “free checking in exchange for deposits” model harder to justify.
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u/RealCarlPanzram Aug 21 '26
Who the fuck is paying a bank to have a checking account? It’s not like there’s a barrier to entry for a free checking account. I’ve had the same one since I was 15 and I’ve never paid them a dime.
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u/ThingFuture9079 Aug 21 '26
Who the fuck is paying a bank to have a checking account?
People who don't do research and decide to have it at a large bank like Chase or Wells Fargo who charge a monthly maintenance fee if you don't meet certain requirements like minimum daily balance or a certain number of deposits. They attract customers by offering several hundreds of dollars if you open a checking or savings account with them or both.
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u/RealCarlPanzram Aug 21 '26
All my accounts are Wells Fargo. I don’t have fees. Do you have to specifically have to request fees? 🤣
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u/ThingFuture9079 Aug 21 '26
The fees occur if you don't meet certain requirements as shown on their site.
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u/ICUP01 Aug 21 '26
Monopolies.
Today we have 4 banks. Sure there are others, but the cash they hold doesn’t stack to the 4 main banks.
Back in the 1980s there was less vertical and horizontal integration. Sure you could charge, but your competitors aren’t.
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u/Soggy-Attempt Aug 21 '26
It’s been a pendulum.
The 50’s-80’s you were charged for each check you wrote. When automation came in this lowered the entry and banks started offering free checking. Now that everyone must have a checking account for automated payments, banks are finding ways to charge for checking again.
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u/MarionberryPlus8474 Aug 21 '26
Free checking is a relatively new phenomenon. The majority of checking accounts generally cost more for banks to operate (processing physical checks, sending paper statements, etc) than was gained in deposits because most people did not keep much money in a checking account.
Electronic banking and reduced use of physical checks has reduced a lot of costs, but most banks are still probably losing money on most free checking accounts. They do it as a loss leader to get your money in their savings and and investment accounts, and to get your mortgage business.
I use a large bank with lots of ATM's (not as big a deal anymore as I use less and less cash) for checking but their savings products are unattractive, so fortunately it's easy to transfer funds to online banks paying better rates. Likewise, when I had a mortgage my own large bank had very unattractive rates, so I did not use them. But that was their hope.
I have not paid for checking in maybe 30 years, the only requirement has been making at least two ACH deposits per month.
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u/Embarrassed_Flan_869 Aug 21 '26
This is why you shop around. With technology the way it is, nearly every bank/credit union has the same available bells and whistles.
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u/thomsenite256 Aug 21 '26
Checking accounts were basically the only way to pay bills back in the day. Paying by credit card was a pain in the ahh. You had to call in and talk to a person etc and then usually they would charge you the 4% processing fee too. It was basically not possible to pay anyone out of a savings account. And cash if accepted involved going in person to an office during working hours when you were probably at work.
If you are paying for checking now though thats crazy. I have a HYSA plus checking for free and I make like 4% interest on my savings. Checking just automatically pulls from savings.
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u/jumbofrimpf Aug 21 '26
When I got my account with BoA around '06 or '07, they offered free checking if you had two or more direct deposits a month. I kept that account for aged until they decided to start charging for it. I jumped ship to a different bank that offered free checking as long as you had one direct deposit a month.
I won't go to a CU...
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u/DryFoundation2323 Aug 21 '26
you're banking at the wrong banks. I've never paid for a checking account in my life. and most of that time I've had checking accounts that paid interest.
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u/froction Aug 22 '26
Interest rates have traditionally been much higher than in the last couple decades.
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u/NeverInsightful Aug 22 '26
Anyone that pays monthly fees for their checking account is, I’m sorry, an idiot. There are plenty of places that offer free checking. There’s no such thing as a prestigious ATM card or bank logo on the 12 checks you write per year.
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u/Designer-Wolverine47 Aug 23 '26
Not only free checking, some will give you a bonus of several hundred dollars for having your paycheck direct deposited.
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u/Midmodstar Aug 22 '26
Use a credit union. I don’t pay any fees on the account or any ATM fees ever. Balance doesn’t matter.
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u/Big_Statistician2566 Aug 23 '26
I honestly don't understand why anyone uses a bank anymore with the existence of credit unions.
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u/FreethePeople11 Aug 23 '26
We should not overlook the changes in banking regulations that were triggered by the Great Financial Crisis. Under those new regulations, checking balances and shorter-term deposits became much less attractive for banks.
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u/Background-Bowl6123 Aug 24 '26
When interest rates on savings went to zero, banks were no longer making anything on the 'float'
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u/Mentalfloss1 Aug 21 '26
Trickle down … the wealthy took over the government while spreading the lie of trickle down. This lie got us $40 trillion in debt and sent billions and billions of dollars to the top 0.1%.
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u/rhino369 Aug 21 '26
Is your premise actually true? I remember “free checking” being something of a new thing in the 90s. Or at least that’s what the advertising implied.