Tim McNamara

Even when the bank loses, it wins

I was initially surprised to see an increase in bank accounts that have zero fees. An example includes the National Bank’s Freedom Account. The account will waive all fees, so long as $2,500/m is deposited into it.

You could put this down to competition or the reduced cost of business in an Internet-era. However, I don’t think it’s either of those. Perfect competition produce prices that equal the marginal cost. It doesn’t produce services for free. Computer systems are not free. Also, banks have been using computers for decades, and I know that bolting new web systems onto legacy COBOL/Fortran cores is likely to be more expensive than relying on tellers. Tellers are cheap, COBOL programmers are not.

Then I remembered that banks are interested in having their loans paid as slowly as possible, ideally with late payment fees sprinkled in. With the zero fees accounts, the trick is to make sure that the threshold for the minimum deposit is reachable only when one’s salary is paid into it. If the bank forgoes fees on a cheque account, their customers will not be putting their salary directly on to their credit card(s) or mortgages. This means that customers will be necessarily be paying off things more slowly, as interest tends to accrue daily.

What I find most intriguing about this strategy is that the banks have been able to make more money from people who are attempting to be financially contentious. Account holder is thinking they’ll be better off: “Wow, I’m free from banking charges”. When, most of the time, they’re probably worse off. They’ll be spending much more on interest over the long term. To make things better for the bank, when you deposit money into a cheque account, banks will be able to lend on the positive balance. However, when you pay off debt, you’re simply reducing the asset side of the ledger.