TCF is putting an end to totally free checking

TCF Financial Corp., the bank that turned retail banking upside down two decades ago when it introduced "totally free checking" accounts, will soon put an end to them.

Bill Cooper, chairman and chief executive officer of the Wayzata-based regional bank, said Thursday that new rules that limit overdraft fees will force the bank to introduce a monthly maintenance fee on more than 1 million checking accounts that previously had none. He declined to disclose the amount of the new fee, which will go into effect early this year.

"It's the end of an era," Cooper said in an interview. "We invented totally free checking and everyone copied it. It was a wonderful product. But the regulatory apparatus, misinterpreting what everyone wants, has changed that."

Cooper disclosed the change on the same day TCF reported a 30 percent drop in fourth-quarter profits. The bank said losses on real estate-related loans continued to weigh on its results, though the bank had a surge in deposits and loan growth. It posted fourth-quarter net income of $19.5 million, or 15 cents a share, down from $27.7 million, or $20 cents a share, a year earlier.

Free checking is fading into obscurity as cash-strapped banks seek new ways to raise revenue. In July, new Federal Reserve regulations will prohibit banks from charging overdraft fees on ATM and debit card transactions unless customers "opt in" to overdraft protection. For TCF and other banks, overdraft fees are a major revenue source.

The new rules will protect consumers who unknowingly overdraw their accounts and then get blindsided with overdraft fees. Consumer advocates have dubbed it the "$35 cup of coffee" -- a reference to the overdraft fee that can be slapped on small purchases exceeding an account balance.

TCF is not the first to move away from free checking. Last year, J.P. Morgan Chase quietly renamed its Chase Free Checking program Chase Checking, and added a $6 monthly fee. Other banks have hiked their ATM fees or introduced charges for features, such as identity theft alerts, that they once offered for free.

At TCF, customers will still be able to avoid monthly fees if they maintain minimum account balances, though Cooper didn't say how much will be required.

A seminal point for the bank

Even so, the move by TCF marks a turning point. The bank introduced free checking in 1986, turning it into a competitive weapon. At the time, it was not unusual for banks to charge $20 a month for a checking account. Although the term free checking was a bit of a misnomer (the bank still charges for checks and overdrafts), the new product brought a flood of depositors to the bank. Other banks soon offered free checking accounts to compete.

Cooper credits former TCF president Bob Evans with introducing the product and still considers it a seminal point in the bank's history, helping transform it from a small and struggling savings and loan into a major regional bank. In 1986, TCF had just 35,000 checking accounts. Today, the bank has 1.7 million.

"Everyone in the business world said we were nuts" when the product was introduced, Cooper said. "But we just went at it and marketed it hard, and it became very big."

Revenue from service fees

Cooper said the new fees would not be necessary if the Federal Reserve hadn't changed the rules for overdraft protection -- rules that Cooper considers unnecessary. The bank generates about one-quarter of its revenue from service charges -- far more than the average bank -- because TCF has a disproportionate number of checking account customers for a bank of its size.

According to Cooper, about 60 percent of all transactions at TCF that appear overdrawn at the point of purchase are not actually so when the transaction is processed later. He said many customers prefer overdraft protection, and will retain it. The bank currently offers it automatically unless the customer opts out. Come July, customers must sign up for the protection, or they won't have it.

"You're not happy if you're in Duluth and you're trying to buy gas at 2 a.m. and we don't authorize it" because the customer doesn't have overdraft protection, Cooper said. "I'd love to have that guy in Duluth call [Federal Reserve chairman] Ben Bernanke and say, 'Hey, I don't like your new rules.'"