The main function of banks and the way they make most of their revenue is by making loans. These loans can include car loans, mortgages on homes, commercial loans for businesses, and student loans for college students. The interest paid on these loans provides a good stream of income to the bank.
In order to be able to loan money to customers the bank first has to gather money to loan. They do this by collecting money into customer deposit accounts. These can consist of checking, savings, money-market and CD accounts. In order to offset the administrative expense of maintaining these accounts and to provide an additional source of revenue, most banks will charge the customer a small monthly fee on each of these accounts.
Because there is significant competition between banks to gather these deposits, they are always looking for ways to make their accounts the most attractive by offering higher interest rates on the accounts or sometimes even offering free money for opening a new account. One of the most common offers is the "Free Checking" account. While these accounts are advertised as free, i.e. they don't include a monthly service fee, in reality some banks still charge the fee unless certain actions are taken each month to waive the fee. The most common of these actions include;
- Minimum Balance - Because very small accounts do not provide very much money to be loaned out, banks have incentive to reward larger account balances. By setting a minimum monthly balance such as $500 or $1000 to waive the fee, the bank creates incentive for the customers to leave higher balances in the account.
- Debit Card Usage - Whenever a customer uses their debit card to make a purchase the merchant is charged a fee by their card processing company. The bank in turn receives a small portion of this as additional revenue. To increase the frequency of these fees, banks will reward customers for using the card frequently by waiving the checking account fee after a certain number of uses, typically 10-15 times, per month.
- Total Relationship - If a customer has a small balance in their checking account that falls below the minimum stated for the account, but also has a large loan balance or deposit in another account, the bank will typically take these other accounts and include them in a total client relationship balance and reward the customer with a waived fee.
While free checking accounts may still require some action on the part of the customer to eliminate associated fees, banks are very anxious to make it happen. As a result, with a little bit of comparative research, the customer can find the bank that offers the best options that work for them.