NCPA - National Center for Policy Analysis

The Free Checking Restoration Act

October 28, 2010

There are two main culprits in free checking's demise: the Federal Reserve's new rules, in effect since July, that restrict banks from charging overdraft fees when customers overdraw their checking accounts; and the amendment from Sen. Dick Durbin (D., Ill.) in the Dodd-Frank financial reform bill that puts price controls on the interchange fees that merchants pay to banks and credit unions to process debit cards, says John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.

Some have argued that free checking was never "free" because its costs were subsidized by account holders incurring overdraft charges (mainly the poor) and by merchant fees.

  • While it's true that overdraft fees hit the poor disproportionately, the vast majority of even the lowest-income account holders have never been hit with these fees because they've never made purchases with more funds than they had in their accounts.
  • Data from the 2008 Federal Deposit Insurance Corporation's Study of Bank Overdraft Programs show that more than 60 percent of low-income consumers with checking accounts never incurred a fee for overdrawing those accounts.
  • The same was true for 74 percent of middle-income account holders.

If the overdraft rule ill-serves the middle class, the Durbin Amendment makes a mockery of the claim that Dodd-Frank was a victory for consumers over special interests, says Berlau.  

  • This provision requires the Federal Reserve to limit debit card interchange fees that retailers are charged to what is "reasonable and proportional" to cost.
  • Major retail chains -- including Home Depot and 7-Eleven -- fought hard for these price controls on financial institutions.

Now, thanks to "financial reform," these costs will be reduced for places like Walgreens at the expense of middle-class checking account holders paying new fees.

Removing both interchange and overdraft controls that serve as impediments to free checking would be one promise of a freebie that is good politics and good policy.

Source: John Berlau, "The Free Checking Restoration Act," Wall Street Journal, October 26, 2010.

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