Banks can afford to offer free checking accounts with no minimum balance, to responsible people, only because they can charge overdraft fees to irresponsible people. But Congress has now prohibited many overdraft fees, which will result in many banks eliminating free checking, and also require responsible people to subsidize irresponsible people. This is chronicled in a Wall Street Journal news story entitled “End Is Seen to Free Checking.”
As the Journal notes, “Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans. Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time. Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts. ‘If you put $1,000 in a checking account and don’t do anything with it, it will be hard to get that for free,’” thanks to the new rules.
This is becoming a pattern for Congress, passing laws forcing responsible people to subsidize irresponsible people. It did the same thing with the bailouts, and with the CARD Act of 2009, which effectively forced responsible credit cardholders to subsidize irresponsible credit cardholders. That credit card law, which limited what banks could charge irresponsible credit holders, led to the return of annual fees on some credit cards, and wiped out many cash-back and rewards programs.
The elimination of free checking thanks to Congress’s unwise restrictions on overdraft fees will harm low-income people by driving them back to check-cashing stores that charge them money to cash every check. “The offers of free checking without any minimum balance requirements attracted a new wave of low-income customers, who previously went to check-cashing stores.”
Some in Congress want to impose interest rate ceilings on credit cards and restrictions on interchange fees. Australia tried the same thing, and it backfired, harming consumers by forcing credit card companies to increase annual fees on responsible credit cardholders and scale back rewards programs. (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)
As law professor Todd Zywicki notes in the Wall Street Journal, the proposed legislation would harm both consumers and small businesses, since it would
reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users. The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase. Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.
Earlier, Congress and the President misguidedly attempted to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act), that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.
All these bailouts are taking their toll on the economy. Economists and real estate experts say a $75 billion mortgage bailout program devised by the Obama administration is actually harming the economy, the housing market, and the construction industry.
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