The banking industry's effort to compensate for lost overdraft-fee income by phasing out free checking has hit a roadblock.
Citigroup Inc., one of the first large institutions to try to add fees to some existing "free" checking accounts, has agreed to delay charging those fees for another year as part of an agreement that the office of New York Attorney General Andrew Cuomo announced Monday.
The agreement only applies to Citi, but Cuomo sounded a warning to other financial institutions considering following in its footsteps.
"Today should serve as a notice to the entire banking industry. We have been watching for some time, and we will continue to scrutinize fees that banks are charging consumers," he said in a conference call Monday to discuss the agreement with reporters. "If you are going to change terms and increase the fees [that] you are going to charge consumers, make sure you take notice."
Free checking accounts have long been subsidized by overdraft fees, which were restricted by a November rule from federal regulators.
The industry has anticipated a widespread cutback in free checking accounts at least since the fall, when several banking companies started to adjust their overdraft-fee policies in anticipation of the November regulation.
Citi was one of the first large institutions to try to offset the loss of overdraft-fee income by adding fees to some existing "free" checking account products, a move that was originally slated to take effect Monday.
When a prominent institution like Citi takes a big step like adding checking account fees, "it's a lot easier for the rest of the marketplace to follow," said Duncan Douglass, a partner in the Alston & Bird LLP law firm. But the outcome of Cuomo's investigation "definitely may slow things down in terms of others that may like to follow."
The New York banking company said in November that it would start charging monthly fees for its "EZ Checking" and "Access" accounts, unless depositors maintained a $1,500 combined balance average. Most affected customers would be charged $9.50 per month, or nearly $120 a year, for checking accounts that Cuomo said Citi once marketed as "free."
Instead, he said Monday, Citi has agreed to hold off on imposing those fees for some existing customers. Under the agreement, Citi will wait until next year to start charging a monthly fee to any qualifying customer who signed up for an "EZ Checking" or "Access" account between Jan. 1 and Nov. 5, 2009. (Account holders will have to continue using direct deposits or making two online bill payments a month for the fee to be waived.) Cuomo's office said the agreement will save more than 1 million people "tens of millions of dollars."
"Citi said they were promising free checking. Those were the words," he said. "Free checking is free checking." (Citi denied "any law violations" in the matter.)
Cuomo acknowledged that other banks could change their products without drawing his ire. "They can change the terms of the deal, but it has to be after people have a reasonable notice," he said, defining "reasonable notice" as "about one year" in Citi's case.
A Citi spokeswoman said it "still offers a Basic Checking package, with a low $3 monthly fee in most areas and no minimum balance requirement. Also, Citibank's balance requirements and monthly service fees are among the lowest in the industry for similar packages."
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access