If checking accounts are not as profitable as savings accounts why do banks offer them

Banks are aggressively promoting free checking accounts. But some customers are discovering that free often comes at a price.

While customers no longer have to pay fees if their balances drop below a minimum, many who open these accounts often end up paying more in other charges, like those for bouncing checks or using automated teller machines. Without a minimum balance requirement, people may be careless about keeping enough in their accounts to avoid bouncing checks.

''The fact is, free checking accounts don't turn out to be free for a lot of people,'' said Gary D. Stein, a partner at the Capital Performance Group, a Washington consulting firm focused on banking. ''Banks make a lot of money off these accounts.''

Banks make money from free-checking customers in three ways. Because such accounts generally pay no interest, they provide a cheap source of money for the banks, which can then reinvest the money elsewhere, Mr. Stein said. The banks also use the accounts to attract new customers who will then buy their other products, like insurance or mortgages. Banks also charge many fees, particularly for covering bounced checks.

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The banks' eagerness to promote free checking comes at a time when consumer banking has been ''the one bright spot'' for the industry, said Judah Kraushaar, a bank stock analyst at Merrill Lynch. Profits are down in many other financial areas, like managing money, lending to corporations and selling new issues of stocks or bonds.

For most banks, fees probably account for a third or more of revenue, Mr. Kraushaar said. The banks do not consistently specify what percentage of those fees are tied to bank deposit accounts, but those fees are probably growing faster than any other type, he said. Asked about the fees they charge checking account customers, banks say it is the customers' responsibility to be aware of the fees and be careful to avoid them.

''You get into the theater for free, but we make money on the pop and the popcorn,'' said William A. Cooper, chief executive of TCF Financial in Wayzata, Minn., which was one of the first banks to promote free checking aggressively.

TCF can charge free checking and other accounts 36 different fees, Mr. Cooper said. Half of TCF's checking-account customers avoid paying any penalties in a given month. But the other half pay so much that more than a quarter of the bank's operating revenue last quarter, or $59 million, came from such fees. The fees helped push earnings up 16 percent at the bank from the previous year.

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