Checking accounts: A new source of fees?

NEW YORK - First, terms on credit cards got harsher. Now some people are seeing higher fees on their checking accounts.

Citibank customers with Access or EZ checking accounts will now be charged a $7.50 monthly fee unless they maintain a $1,500 balance. Previously, the monthly fee was waived if customers set up direct deposit for paychecks or two automatic bill payments.

Those measures will no longer automatically qualify customers for the fee waiver. The change takes effect in February; customers will be notified this month.

Natalie Riper, a Citi spokeswoman, said the change will "impact a relatively small percentage of our customers" since most people maintain the $1,500 balance. She declined to give specifics on how many people would be affected.

Meanwhile, Bank of America raised its monthly fee on checking accounts to $8.95 in June, up from $5.95. The North Carolina-based company will continue to waive fees for customers who set up direct deposit, maintain a $1,500 monthly balance or open accounts online.

The change by Citi comes as Congress considers legislation that would limit banks' ability to levy overdraft fees on checking accounts. In recent years, it has become the industry norm to automatically enroll customers in overdraft programs.

Consumer advocates say the programs are misleading because most people assume they can't spend more than they have with debit cards. Fees for overdrawing an account can be as much as $35 per violation.

The scrutiny over bank fees in the past year has led to a sense in the banking industry that "free checking as most of us know it can no longer exist," said Bob Meara, a senior analyst at Celent, a Boston-based financial research firm.

That's because overdraft programs have been a critical source of revenue for the industry.

In 2007, banks earned about $29 billion from overdraft fees, according to Oliver Wyman, the parent company of Celent. However, only about 5 percent of customers accounted for 68 percent of those fees; 74 percent of accounts didn't incur any overdraft fees.

That means a small slice of customers were essentially underwriting the cost of providing free checking accounts to the majority of people. So clamping down on overdraft fees means banks "have to absorb the costs by other means," Meara said.

Already, a spate of large banks have announced plans to make their overdraft programs more consumer friendly. Many now plan to require customers to opt into the programs and are lowering or capping penalty fees.

If stricter legislation passes, however, banks may be forced to adjust checking account policies.

To provide a safety cushion against overdrafts, for instance, banks may start requiring minimum balances, said Nessa Feddis, a retail banking expert with the American Bankers Association, an industry group based in Washington, D.C.

The crackdown on overdraft fees could also limit the ability of those with poor credit histories to get checking accounts, Feddis said.

"It's the only reliable predictor of whether someone might overdraw," Feddis said.

For now, the changes by Bank of America and Citibank seem isolated. Representatives from Chase, PNC Financial and Wells Fargo said no changes had recently been made to their checking accounts, and declined to speculate about future strategies.

"Citibank's move is somewhat pre-emptive — it's laying out a position to see how other banks react," Meara said.

Of course, deeper troubles may be prompting Citi's change.

The bank was one of the hardest hit by the economic downturn and has reported massive losses in the past two years. It received $45 billion in loans from the U.S. government, which now owns a 34 percent stake in the bank.

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