This article was originally drafted back in 2009 and refreshed in 2024. Back then, online banking was just breaking into the mainstream. Today, with EQ Bank, Simplii, Koho, and Wealthsimple Cash, no-fee banking is the norm for younger Canadians. What hasn’t changed? The big banks still rely on “service charges” to quietly erode customer balances. This approach is particularly problematic for those who can’t park $5,000 just to avoid fees.
Bank Fees as Simple Interest
What if banks had to tell you their service charges as an interest rate?
Bank Fees are clearly displayed as a dollar value. As an example $15.00 for our Extra Special Banking Service. However, what if we do a little simple arithmetic? Michael James could do the more interesting compound interest version of this equation.
Assume that you hold a balance of about $500 in your chequing account over a year and that you receive no interest on your balance. You do, however, get charged $12.95 a month for the Extra Special Banking Service offered by Leech Banks.
Let’s wander through the calculations:
- If you pay $12.95 monthly in service fees (excluding other fees for cheque printing, non-bank ATM withdrawals, etc.), that adds up to $155.40 in service charges in a year.
- Assuming we keep the balance in our chequing account at $500.00
- If you use a simple interest model (compounded once a year), you then have paid a 31.08% simple interest charge for this service.
Think about the number you just saw. You lost over 31% of your principal due to your bank withdrawing service charges. This value would be higher if you had a monthly compounding period (I think). Suppose you carried more money in your account. In that case, this might be a lower rate (in my bank, if I hold over $5000 in my chequing account, I don’t pay at all). Still, if you kept a lower principal, the rate would even be more astronomical (if you held a balance of less than $200, it would be closer to a 100% simple interest charge).
Would you use a bank that gave you -31% interest on your chequing account? Would you go anywhere near a bank that advertised that service?
What to do about service charges?
The easiest thing to do is find a bank that charges no Service Charges.
- Most major banks will charge no fees if you carry a minimum balance of $5000 in your account. I don't like this solution, but it does work.
- Find an online bank like EQ Bank (a sponsor) that charges no fees. PC Financial and Simplii also have no service charges. Many Credit unions offer no fees. Don't be afraid to change your bank.
- Be a Senior Citizen. Most banks offer zero-fee accounts to Seniors. Seems a bit drastic, but it works as well.
Epilogue
This is a rework of an article I wrote back in 2009. Banks rely on “fee fatigue” the idea that $12.95 feels too small to bother switching over. The psychological trick for you? Flip the framing: treat bank fees as negative returns on your money. Once you see it as 31% instead of “just $12.95,” your brain starts screaming to act. Another trick: automate savings the moment you cut fees. If you save $12.95/month, set up a transfer to your TFSA then the “fee money” becomes investment money.
FAQ Bank Service Fees
If you pay $12.95/month on a $500 balance, it’s like paying over 31% simple interest.
Yes. Many online banks and credit unions offer no-fee chequing. Big banks waive fees if you carry $5,000+.
It’s part of their revenue model but with today’s fintech options, you don’t have to accept them.
Yes, most banks waive monthly fees for seniors, though requirements vary.
It’s time to go find a free chequing account. If you’re actually getting something for your $12.95 per month, then it’s not fair to treat it like interest, but if you’re getting the same thing that’s available with free chequing accounts, then it’s fair to call it interest of a sort. Weird things happen when compounding negative rates — they actually become a little less negative (-27% in this case).
Pffftt… numbers, how important are those to finances 🙂 (yes that is sarcasm)
Interesting idea, that a bank account can charge the same rate as a credit card. Too bad we don’t live in a society where the banks are grateful to the people who provide them capital.
Luckily my husband is a big five bank employee so we get free banking, lower mortgage rates (3.55 fixed 5 year) and brokerage fees applicable to people with high brokerage account balances (9.95 per trade).
If he wasn’t working there, I would use the bank I used before I married him – PC Financial…they have an unlimited chequng account with no monthly fee – http://www.banking.pcfinancial.ca/a/products/chequingAccount.page?refId=sidenav – unlimited debit card uses, unlimited cheques etc. Before I met him, when I was with PCF, I never paid any fees because I always used PC or CIBC atms. The only way you’d pay fees with them is if you used some other atm or if you needed a special request like a bank draft. So for everyday banking, why would anyone bother pay fees to be at some other bank for their chequing account? It makes no sense.
I still maintain my PCF chequing account and put money into it so that I can use the debit card at real canadian superstore and no frills and thus get PC points which equate to a dollar value.