True Cost of “Free Bank Accounts”
Updated: Aug 1, 2020
Large banks are happily taking your money for “free”.
A reductionist history of what is now “free checking/savings accounts” goes a little something like this:
There are a lot of banks in the United States (7,000+) and with the advent of far more efficient communication methods (i.e., the internet) competition for your deposits heated up. As bank deposit accounts are a commodity good and cost the bank relatively nothing to operate in the first place, banks were inevitably forced to offer them for “free” (the modern-day equivalent of what Robinhood just forced upon the brokerage industry). Fast forward 30 years, almost all basic deposit products are “free” to open.
Aside from this factual statement that the account may now be free to open, every single other action/service related to your account is meant to exploit you for the lost income source.
The obvious exploitative practices:
1. Paying you 0.01% interest
For one reason or another, the general public appears completely fine with allowing large banks to give them nothing in return for their cash. It almost appears that we have forgotten that they need us (depositors) to operate far more than we need any particular version of them (remember that 7,000 shiny buildings are doing the same thing).
At Froogal (a digital savings platform that I co-founded), we are entirely sure it’s due to the average blue-blooded American being exhausted with dealing with banking antics, the effort required to switch banks (and then have your new bank pull the same nonsense), and more importantly the fact that 99% of people don’t care about earning 1% in extra interest after all of this. So we flipped the script (this is not an article to sell you but to simply propagate that what we are witnessing today will not be here tomorrow) and offer rewards for saving money that makes your life better TODAY (Netflix, Spotify, Instacart, Fabletics, Massage Envy, Muscle/Supps boxes, and so much more). That’s all. No more sell but just don’t let something better pass you up.
Estimated cost per year: $200
*All estimates based on $10k balance
2. Over-draft fees (aka the “fan favorite)
As you know, few things hurt as badly as getting hit with a $30 overdraft fee when you had plenty of money sitting in a checking/savings account with the same bank. Especially after the bank PURPOSEFULLY withdraw money from your account in the exact order that would trigger overdrafts (yea this sounds made up but it’s accurate — https://www.latimes.com/business/la-fi-bank-overdrafts-20161229-story.html).
A large number of FinTechs have sprung up over the last 10 years to address this problem specifically (Dave being our favorite) and it’s another great example big banks taking advantage of the fact that any normal person isn’t going to monitor every single transaction all day long and may forget to check the f*ckin box on your bank’s website that logically stops the overdraft from happening.
Estimated cost per year: $35 to $70
3. Account Maintenance Fees
Dear every banker who has these — what exactly are you “maintaining”? It costs absolutely nothing to keep track of the fact that I have $6,000 in my deposit account.
This is truly an archaic practice and is 100% meant to exploit low deposit balance savers (rich get richer, poor get poorer scenario folks) and if you see it you should run.
Estimated cost per year: $100
4. Exceeding your “transaction limits” [savings & MMDAs]
Before we even get to fees, let us take a moment to laugh about the fact that some asshole in DC, heavily funded by the very same large banks imposing these fees, decided that the average retail depositor should only be able to make 5 or 6 withdrawals per month from a savings account. Whatever the fundamental basis was for this when the legislation was drafted, it certainly makes zero sense in the modern era and is yet another exploitation tool primarily directed towards lower balance savers.
So you’re trying to pick up a little bit extra interest by using a savings account instead of a checking account and then BANG, Big Bank Bob lays a fee on you for trying to live a life that may require 7 instead of 6 payments during the month. Zero sense.
This is currently being correct for by several FinTechs for the average consumer (including Froogal) and has already been conquered by the wealthy.
Estimated cost per year: $15 (one-time)
The less obvious:
Inactivity Fees — essentially, the bank wants you constantly using your account to increase the odds you slip up and they can hit you with a fee or can shove loan/investing advertising down your throat.
Checks/Cards/ATM Fees — luckily, we are almost done with these as digital payments (especially via smartphones) should erase this industry sooner than later. The issue is, most businesses and some absurd landlords still want paper checks and cash so only time will push them to adapt.
Paper Statement Fees — likely the one that drives me crazy at the deepest level, for some reason, banks have decided that they can get you for another fee between $5-$10/month by mailing you a physical letter rather than just emailing me the information that I will never read anyway. As most people forget to switch to “paperless”, or as I like to call it “why isn’t this the only option” statements, banks rake in cash. Even if you like physical mail, do you really think it costs $10 to mail you 2 pieces of paper?
There are a few others but you get the point.
“Free” isn’t free and you are being exploited.
Make a change to any of the new FinTechs out there (and be careful to avoid old banks that simply updated to new names to sound innovative) and get the hell away from large banks.
I, with total admission of bias, recommend you move your savings to Froogal (www.froogal.us) if any of the following strikes a chord:
- Earn real rewards (TV/music streaming, hotel nights/flights, subscription boxes) rather than whatever the hell rate your bank is paying you (prob 0%)
- Plan your financial life where you bank (built for the planner in your life/in every group)
- Want to be able to collaborate for financial life events (weddings, travel, new baby/baby shower, first home purchase, etc)