Sunday, January 9, 2011

Why is free checking disappearing?

The right answer is that it was never "free." Instead you paid for your free checking with other fees generated by your banking activity. But now that Congress has seen fit to limit those fees, banks are charging for checking accounts.
This summer, Wells Fargo replaced its free-checking offering with something called "Value Checking," which requires either a monthly direct deposit of $250 or more or a minimum balance of $1,500 to avoid a $5 monthly fee.

This is another example of Merton Miller's hypothesis that most financial innovation is a reaction to changes in regulation. Remember that inefficiency creates opportunity for those creative enough to figure out how to find and consummate transactions deterred by regulation.

1 comment:

  1. Banks have always charged for checking accounts but you are correct in that they hide it and all sorts of other things in a continual shell game they play. If most Mr. Miller tells us the majority of financial innovation comes about as a result of changes in regulation, what does that tell you about the people in charge of finance?