Free Checking Dying Off With Small Banks

NEW YORK ( TheStreet) - In the past few months Huntington Bancshares ( HBAN) and several other community and regional banks have rolled out free checking accounts in an effort to pick up customers from larger banks.

However, their efforts to gain customers through offering free services may be short lived as regulations costs transform into reality by the end of the year.

"We are positioning ourselves to be the most consumer friendly bank in the Midwest, and we hope to grow by acquiring more customers and giving good service to our existing customers," said Huntington Bancshares CEO Stephen Steinour in an interview with TheStreet. Steinour said the bank launched its new "Asterisk Free" checking account in response to customers concerns about mega-banks implementing checking account fees.

Citigroup ( C) , Bank of America ( BAC) , Wells Fargo ( WFC) and JPMorgan ( JPM) have all added checking account fees, eliminated some customer rewards programs and ended complimentary overdraft programs as regulatory expenses increased due to The Dodd Frank Financial Reform Act.

Large banks have also gradually been implementing fees over the past year to checking accounts in preparation for expenses of The Durbin Amendment , which will limit the interchange fees banks charge to retailers on debit-card transactions. The amendment, set to be finalized by regulators this July, could cost the banking industry in between $13 billion to $15 billion said TCF Financial ( TCB) CEO William Cooper.

TCF, which touted free checking for two decades, said it would be ending its free checking in reaction to expenses from regulations.

Small and community banks have been the holdouts for free checking in the hopes that they could gain disaffected large bank customer. "For the most part, community banks have been waiting on the sidelines," said Jones Day partner Chip MacDonald. "There will be pricing changes for all consumer products at banks. TCF started the free checking model and they are usually the industry leader for community banks. Banks have to charge for some of their services, whether it is monthly maintenance fees, minimum balances, ATM fees or even paper statements."

Curtis Hague, CEO of HF Financial agrees that community banks will eventually have to switch over to charging fees.

"The free checking account is disappearing and eventually it will disappear," said Hague. "Banks are going to take advantage of the climate right now to offer short term free checking accounts, but in order to generate revenue to meet regulatory requirements they are going to have to price their products.

However, not all community banks agree that regulations will mean the end of free checking. New York Community Bancorp ( NYB) will not be switching its free checking option says Andrew Kaplan, executive vice president of retail products and services.

"If the Durbin Amendment were to go into effect in July, our bank will continue with the free checking account," said Kaplan. "We have no intentions to implement minimum balance fees on our products, but we have to keep an eye on our consumer debit card income and expenses. We may have to put limits on how much consumers can spend using debit, which is inconvenient for the customer."

Kaplan adds that customers thinking of switching banks should think about what services besides checking they use and how they want to be treated.

"Customers have to take a look at their entire needs," said Kaplan. "Reward programs and free checking accounts may go away at some banks, but the overall organization remains the same. There is a perception banks are being less consumer-friendly, but that is not necessarily the case, different companies have different benefits."

Community banks have been able to do business by showing customers more personalized service. In order to do that smaller banks have to know their customers and their customers' needs. Customer service will not change even as banks change products and pricing going forward, said Steinour.

"At the larger banks, customer service gets lost and frankly is not even valued," said Steinour.

--Written by Maria Woehr in New York.

To contact the writer of this article, click here: Maria Woehr.

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