Why do banks charge fees?

"I just love paying a $12 checking account fee every month." Umm, no.

"I need to grab some cash at the ATM. Let's find one that charges me twice to get my own money." What?

"I'm not that concerned about my money. I'll just wait to see what my balance is when my statement comes in the mail at the end of the month," said no one ever!

Bank fees might be the single most annoying part of having a checking or savings account. Account fees can be hidden and sneak up on you. Other times they're blatantly up front, feeling like they're just taunting you. But in all cases, when you see one of those fees hit your account, you get annoyed, frustrated, and maybe even angry.

A recent review of national bank fees collected during the pandemic showed that big banks, including Bank of America^®, Chase^®, Citi^®, and Wells Fargo^®, charged consumers over $11.6 billion (that’s right — billion with a big “B”) in bank fees just during the first three months of the pandemic.

So what gives? Why are bank fees so rampant, and costly?

A big reason is — and there's no way to sugarcoat this — banks by design are structured to make money, and if they can charge a few dollars here or there, they will. Most banks are a business, and businesses — especially big businesses — are all about their bottom line.

To understand the "whys" of fees, and how to avoid them, it might help to drill down to consider some of the most common fees you're likely to see.

Bank fees explained

While it is necessary for banks to make money in order to stay in business, pay their employees, and operate the buildings where they keep your money safe, many bank fees are structured so they can be avoided by changing consumer behaviors.

Just like an airline charges a substantially higher fee for your second checked bag to encourage passengers to bring less luggage on the plane (because less luggage means lighter, faster travel, less work for the ground crew, fewer bags to track, and overall lower operational costs). Because the extra weight increases their cost, eating into their profits, they use the charge to change baggage behaviors of passengers.

The same is true of banks. Whether it’s a “non-sufficient funds” or “dormant account,” that extra, non-profitable characteristic of the account is weighing down potential profit. Like airlines, many bank fee costs can be avoided by being mindful of your balance and usage. For example, by enrolling in e-statements, you can avoid a printed statement charge, and the bank saves money on paper, printing, and postage.

Understanding the details of specific fees that could hit your personal accounts will help you manage your money in a way that avoids a costly surprise or recurring fees in the future.

Minimum balance fees

Different banks have different policies when it comes to how much you need to have in your checking or savings account. Often, this is done to encourage you to deposit more money, which in turn gives the banks more capital to work with and grow their business.

While this maintenance fee makes sense from a business standpoint, it fails to take into account the financial strain many families face today. With more than half of Americans keeping less than $1,000 in their savings account, it's easy to see how a minimum balance requirement could send someone who's already struggling financially into the red.

The easiest way to avoid a minimum balance fee is to keep your money with a financial institution that doesn't charge you based on how much money you have in your account. Besides, doesn't it say something good about your bank or credit union if they think your account is just as important as every other account no matter how much money you have?

Maintenance fees

Many banks charge a monthly maintenance fee in order to cover costs associated with maintaining accounts. These fees might also cover the banks' costs to offer additional perks to their account holders. Some of these perks include overdraft coverage programs, no charge for using ATMs outside the bank's system, cashback on spending, and more.

To see if your maintenance fee makes sense for your financial situation, look at your checking account and do some simple math to see if the perks outweigh the monthly fee. If you aren't receiving perks on your account, it may be time to reassess your options.

If you're ready to ditch your monthly maintenance fee altogether, a “free account” is likely the wording you’re looking for when seeking out a better checking account for you.

ATM fees

It's somewhat uncommon to find yourself in a cash-only establishment these days, but when you need to grab cash, a random ATM fee can sting. According to a 2020 Bankrate.com study, if you pay the average ATM fee just once per week, you could be paying over $240 per year.

The double-whammy of ATM fees

It's important to realize there are two types of ATM fees and you can get hit with both. You'll incur fees from withdrawing money from an ATM because the machine is owned by a separate company from your bank. For example, a grocery store may set up an ATM machine as a way to serve customers and make more money, which is known as a "surcharge fee." (In addition to these fees, there may be ATMs that are not well-monitored and could put your card at risk for skimming.)

In addition to the fees charged by the operator of the ATM, your bank may charge you an ATM fee as well. Ideally, your financial institution is encouraging you to use one of its own machines or branches so it does not have to pay its own costs to that external ATM. This type of service fee is called the "foreign" or "transaction" fee.

If you're ready to ditch ATM fees altogether, take a look at checking accounts that refund your ATM withdrawal fees.*

Overdraft vs NSF fees

In terms of bank fees, an overdraft charge is probably the heftiest. Unlike the other fees that you can avoid by finding a legitimately free checking account, an overdraft fee, non-sufficient funds fee, or NSF fee only affect your account if you spend more money than you have in it.

So how do some banks and credit unions justify charging you $25 when your account was only short by $2? Think of it this way: By putting forward the money you don't have, the bank is essentially giving you a loan. The overdraft fee is the cost for the bank to process the imbalance.

To avoid overdraft fees, work on building yourself a solid financial cushion by automating your finances — both your bills and your savings. From there you'll have a clear idea of what money you have leftover each month. You can also get into the habit of checking your online balance daily.

Better yet, set up alerts through your online banking site or app to update you on your balance daily, or when it goes below a specific amount. Not only will this help you avoid overdraft charges, but it will keep your money goals top of mind.

More bank service fees

Banks may also charge fees for special one-time services that are not included in the daily operation of your account. There may not always be a way to avoid the fee for these services but knowing more about them can help you understand if they are expenses you might encounter. You might even be able to find alternative options.

Foreign transaction fee

These fees are assessed any time you are traveling abroad and accessing your money in another currency. This fee can be a flat fee or a percentage of the amount of money you spend. Ask your bank or credit union for more information before traveling overseas. (Bonus tip: it's a good idea to let your financial institution know you will be accessing funds from another country so it does not trigger a fraudulent alert that might impact your ability to use your debit card.)

Inactivity fee

If you have money in an account that you rarely or never access, you can be charged a dormant account fee after a period of time. With the easy accessibility of your money from almost anywhere with mobile banking, it likely makes more sense to close the account and move the funds to your personal accounts that you use on a regular basis.

Stop payment fee

If you write a check and then decide you need the payment to not go to the payee, there are specific windows of time you can request that the payment be stopped. Because it involves a number of steps, often another bank on the other end, and a level of urgency, this is one of those fees that are difficult to avoid.

Stop payment fees often happen when a check is lost, either in transit to its recipient or by the recipient. Using digital payments, or P2P services, can eliminate the need for paper checks and stop payment fees.

Wire transfer fee

If you are sending a sizable amount of money, such as the down payment on a vehicle or home, you may need to send the money to another financial institution using a wire transfer. The amounts vary for domestic versus international wire fees, but there are alternatives depending on where the money is going and how the recipient prefers to be paid.

Before sending a wire transfer, ask at your community bank or credit union what alternatives may be available to move money, especially for larger transfers with charges that depend on the amount being moved.

Time to ditch the fees

Understanding the reasoning behind bank fees may not help when it comes to easing your frustration over them, but hopefully, it clears up some confusion as to why fees are implemented by banks and how those charges hit your account.

From mobile check deposit to direct deposit, there are so many more features to move your money without incurring fees. Banking with your community bank or credit union, using their mobile banking app, and just keeping regular tabs on your balances and spending can help you dodge most fees.

Now that you have all the information, you can find a bank account that fits your wants and needs. If you're ready to ditch those fees for good, consider a Kasasa account. Kasasa offers (actually) free checking and savings accounts, that payout rewards each month, as well as refund your ATM withdrawal fees.

*Qualifications, limits and other requirements apply. See financial institution for details.

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