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Are Free Bank Accounts Actually Free?
If you get what you pay for, what do you get with a free bank account?
Free stuff is great, but wisdom tells us that free things come with a catch. So are free bank accounts actually free, and if they are, how does the bank make money?
What is a “free” bank account?
If you ever see a bank account review or see an advertisement for a “free” or “fee-free” bank account, that usually means the account doesn’t charge a monthly maintenance fee.
Monthly maintenance fees, sometimes called service fees, are used to maintain a bank’s infrastructure (like branches and ATMs) and, of course, make it money.
Most banks are for-profit institutions, so many charge monthly fees in exchange for using their accounts. Makes sense, right?
This begs the question, though — if a bank doesn’t charge monthly maintenance fees, how are they making money? Even more puzzling, if the account pays you interest, how are they affording to pay you interest if you get to use the account for free?
The truth about free bank accounts
Banks with no-fee accounts, such as SoFi®, Capital One and Ally Bank, make their money in other ways, mainly through interchange fees.
Interchange fees, sometimes called a “swipe” fee, are fees charged for processing card transactions. These fees are set by the card networks themselves, which include Visa, Mastercard and American Express. And each type of card can have a different interchange fee (debit, credit, business, etc.).
When you swipe your debit or credit card, the card network gets paid a fee by the merchant for processing the card, and then the bank gets a percentage of that interchange fee.
The good news is that merchants don’t typically pass these fees onto you, the consumer.
This is how many online banks make their money and can get away with not charging consumers monthly fees. So while you aren’t paying a monthly fee to keep the account open, you’re making the bank money by just using the card.
Chime, a fintech with banking services, is pretty up front about this, saying “You don’t pay monthly service fees or similar fees to Chime; instead, most of Chime’s income is from Visa.”
Other banking features can cost money, though
Just because a bank account doesn’t charge a monthly maintenance fee doesn’t mean that every service it offers is entirely free.
While you might not be paying a monthly maintenance fee, watch out for these other fees on “free” bank accounts:
- Overdraft fees, often around $30 per incident
- Out-of-network ATM fees, often around $3.50 per transaction
- Paper statement fees, often $5 per month
- Wire transfer fees, usually around $10 to $50 per wire
- Foreign transaction fees, often 1% to 3% of the transaction
- Account closure fees, can be $5 to $50 one-time fee
- Inactivity fees, often $5 to $10 per month
- Card replacement fees, usually between $5 and $20 per card
Other revenue options for free bank accounts
Interchange fees are just one part of how “free” bank accounts can make money. Other revenue streams can include:
- Lending services. Offering loans means banks can earn interest. Online banks like SoFi offer student refinancing, auto loans and mortgages, which can all generate revenue from interest.
- Advertising. Banks can have partnerships with other companies and pitch those products to you, like ads in your mobile banking app or email campaigns.
- Selling data to third parties. Banks can collect your spending data (unless you opt out of it) and sell that information to third parties for targeted advertising.
Bottom line
A free bank account doesn’t mean you won’t ever pay anything ever to use the account. If you overdraft, use your debit card overseas, make a wire transfer or order paper statements, you’ll probably pay a small fee for that.
Of course, not having to pay a monthly maintenance fee is great, but make sure to read through your account’s deposit agreement so you know what fees you could be charged.
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