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Why do banks require minimum balance to avoid a fee?

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Listed:
  • Oz Shy

    (Federal Reserve Bank of Atlanta)

Abstract

Large banks in the United States waive their monthly account fee if depositors maintain above a certain minimum balance in their account. This article analyzes the conditions under which banks benefit from applying this pricing strategy. I find that the minimum balance strategy is profitable when banks possess only moderate market power. In contrast, under strong market power, this strategy is less profitable than charging monthly fees to all depositors regardless of their deposit amount. Common ownership of banks reduces the gains from the minimum balance pricing strategy. Interest rate competition together with fee competition eliminate these gains.

Suggested Citation

  • Oz Shy, 2024. "Why do banks require minimum balance to avoid a fee?," Annals of Finance, Springer, vol. 20(4), pages 395-420, December.
    • Handle: RePEc:kap:annfin:v:20:y:2024:i:4:d:10.1007_s10436-024-00449-2
    DOI: 10.1007/s10436-024-00449-2
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    More about this item

    Keywords

    Checking account pricing strategy; Minimum balance requirement; Monthly account fee; Common ownership; Fee and interest rate competition;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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