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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, earn some 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?
How free bank accounts make money
Banks with no-fee accounts, such as SoFi®, Capital One and Ally Bank, make money primarily through interchange fees — charges paid by merchants for processing card transactions. Interchange fees are sometimes called a “swipe” fee.
The card network (like Visa, Mastercard, etc.) collects the swipe fee, and the bank gets a percentage. Merchants don’t typically pass these costs on to its customers, so while you aren’t paying a monthly fee, the bank earns revenue every time you use your card.
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.
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. 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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