Answer: Checking accounts provide banks with a cheap source of funds (they pay almost no interest on them) that they then loan out at much higher interest rates. So, for example, say I deposit $1,000 into a checking account paying 0% interest and the bank lends that $1,000 to a credit card customer paying 15%, the bank earns $150 in interest from the credit card customer and pays me bupkis:)

From Motley Fool’s analysis of a bank, Bank of Marin, that has increased their percentage of checking accounts that are FREE:

Banks make money on the difference between long-term interest (money they loan out) and short-term interest (money they borrow). When banks loan out money to finance a home or business, they have to first borrow that money at a lower rate. That money can come from deposits (like checking or savings accounts) or a short term loan (like a CD). Any lowering of the interest banks pay increases their profit on the loan.

Bank of Marin has moved toward interest free checking accounts because they are the cheapest source of funds…

Of course, there is always the fee income that comes from “free checking” like overdraft fees too!

________

Check out this NGPF Data Crunch: How We Pay For Stuff: Debit, Credit or Prepaid?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

More posts by Tim