Why Do Some Accounts Have Minimum Balance Requirements?

Financial institutions operate like any other business by keeping expenses low while maximizing revenues to have the highest profit margin possible. To this end, they will take certain steps to lower costs of which one of these is requiring a minimum average monthly balance for some types of personal checking or saving accounts. This decision impacts the institution's bottom line, sometimes for better or worse, and it's not always written in stone for some customers. Let's take a look at some of the reasons why a minimum balance may be required and what, as a consumer, you can do about it.

The primary way a banks make money is by lending money to borrowers in the form of auto and home loans. But this money has to come from somewhere and in the case of financial institutions it originates from demand deposits. Demand deposits are the money consumers put into various accounts, such as checking, saving, certificates of deposit and money market, which is then lent to borrowers. They make money from the difference in interest rates between loans and deposits. Ideally a bank or credit union will offer a 60 month auto loan for 5.9% while paying 0.5% to the deposit account were the loan money originated. Of course, running a business is much more complicated than that which is where minimum balance requirements come in.

Many financial institutions require minimum balances on accounts to both increase demand deposits but also as a penalty against certain behaviors. Bank's have labor expenses like all businesses and it is in their best interests to keep its employee base as small as possible. This is why ATMs, online banking, banking over the phone and direct deposit are all offered. These services of course add value for customers but it also means fewer tellers. Many banks and credit unions will waive the minimum monthly balance requirement if customers set up direct deposit for their checking or savings accounts. This uses less teller time but it also strengthens the existing relationship making it more difficult for customers to change banking institutions.

Minimum average monthly balance requirements also apply more often to interest-earning accounts. The quid pro quo is that if a customer is going to receive interest on their demand deposits then they will be required to have a certain level of funds available which the bank can use for loans. This is why there are many starter checking and saving accounts which don't have a minimum balance requirement but also do not pay any interest. Some customers have the negotiating power through other financial connections, such as a small business loan or multiple mortgages, to waive fees other customers would normally be required to pay.

As consumers, having checking or saving accounts with minimum balance requirements is not mandatory. Fortunately, the free market economy and competition virtually guarantee a competitor will offer more value for less money such as interest-earning accounts without a minimum balance requirement. Consider selecting a banker or credit union like shopping for cereal or gasoline, shop around to get the best deal and protect yourself from paying unnecessary fees.