Study Finds Some Checking Fees Wipe Out Interest
Monthly fees for interest-bearing checking accounts at California savings institutions continue to rise while interest paid on the accounts has dropped to as low as 4%, meaning that some accounts are costing consumers more than they earn, a survey to be released today by a San Francisco consumer group shows.
As a result, so-called “money-market” checking accounts--which paid high rates two or three years ago--are beginning to lose popularity among consumers, with some institutions combining them with standard checking accounts, banking experts said Monday.
And California institutions generally continue to pay lower interest rates and charge higher fees on checking accounts than the national average, industry observers said.
“Anyone who opened an interest-bearing checking account several years ago should look very carefully at the wisdom of continuing that account,” said Ken McEldowney, executive director of Consumer Action, the San Francisco- based consumer organization that conducted the survey of 91 savings institutions.
In some cases, he said, the consumer may be better off putting money into a non-interest checking account because the fees may be lower.
“More than ever it pays to shop around for a checking account,” survey director Sheila Kolenc said.
The survey, dated Oct. 20, is the latest evidence of how savings institutions have raised fees on basic banking services that had been free before banking deregulation began in the late 1970s, consumer advocates said. Bankers contend that the higher fees are justified in part because of rising processing costs and because fees before deregulation were kept artificially low.
The survey also illustrates how lower interest rates are beginning to undermine some of the benefits intended for consumers under banking deregulation.
The so-called NOW (negotiable order of withdrawal) account, for example, had paid between 5.25% and 5.5% at nearly every major bank and savings and loan association since it was created in the late 1970s as the first interest-bearing checking account. Before then, interest on checking accounts was prohibited by federal banking laws.
However, several California institutions now pay less than 5% on those accounts, including the four largest California banks--Bank of America, Security Pacific, Wells Fargo and First Interstate.
Meanwhile, so-called Super NOW accounts (often called “money-market checking accounts”)--which had consistently paid higher interest than NOW accounts since their introduction in 1982--these days pay the same as NOW accounts at many institutions.
At seven institutions in the Consumer Action survey, they pay less. One institution, Bank of Walnut Creek, pays as little as 4% on its Super NOW compared to 5.25% on its NOW account. Super NOW monthly fees are typically higher than those of NOW accounts.
Accordingly, NOW accounts have lately become more popular than Super NOW accounts at some institutions. A spokeswoman for Home Savings of America reported that its NOW accounts grew by $84 million in October while its Super NOWs grew by only $20 million. A spokeswoman for Security Pacific reported that its NOW accounts grew during the last month while its Super NOWs stayed flat.
Also, many institutions have combined NOW and Super NOW accounts, in some cases paying higher interest for higher account balances, Consumer Action said.
The organization’s report also showed that one-third of the institutions surveyed this year and last year raised fees on interest-bearing checking accounts, while only one lowered its fees. About three in 10 institutions also increased fees on non-interest-bearing checking accounts.
Monthly fees typically range between $5 and $6 but several California institutions are charging between $8 and $10. Such high fees, combined with lower interest returns, mean that many consumers are probably losing money on their checking accounts because the fees offset interest earnings, Consumer Action’s McEldowney said.
Consumer Action’s survey also showed that many California institutions are requiring higher minimum balances to avoid fees, with some such minimums as high as $4,000 on NOW accounts, $5,000 on Super NOWs and $7,500 on combined accounts.
However, some institutions continue to offer free checking accounts regardless of the balance maintained, Consumer Action said. Such institutions include Barbary Coast Savings Bank, Fidelity Federal Savings & Loan, Homestead Savings & Loan, Santa Barbara Savings & Loan, Sears Savings Bank and Southwest Savings & Loan, Consumer Action said.
Robert Heady, publisher of Bank Rate Monitor, a North Palm Beach, Fla., newsletter, said the survey confirms that California’s checking-account holders are less well off than consumers elsewhere. For example, the 10 largest banks and S&Ls; in Los Angeles are paying an average annual interest rate of 4.91% on Super NOW accounts, compared to an average national rate of 5.20%, Heady said. Also, a smaller proportion of institutions in other states charge monthly fees as high as the $8 to $10 charged by several institutions in California, he said.
“California consumers apparently are being nickeled and dimed to death on bank charges,” Heady contended.
