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I'm learning in economics that if your balance gets too low, you have to pay a fee. Why is this? Is it to help support the bank, or as a punishment? Or is it both?

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  • Please define what you mean by balance being too low. Do you mean it goes below zero? Then you are entering debt which will cost interest. Or transactions will fail and be rolled back which involves additional work for the bank – Manziel Mar 26 at 16:23
  • no i mean like when you hit 25 cents, they charge you like 25 dollars. – Joseph Casey Mar 26 at 16:25
  • Never heard of this and I am pretty sure this would not be legal here in Germany – Manziel Mar 26 at 16:45
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Banks are businesses. The bottom-line goal of any business is to generate profits for shareholders/owners.

Banks generate revenue through various means, but largely from making loans to other bank customers and charging interest on top of the loan amount. They then share a certain percentage of the interest with their customers.

Additionally, every account, big or small, cause a bank to incur expenses in order to maintain it: capital investments in branch locations/technology, paying people to answer the phone when you call, etc. Expenses are paid for by the revenues generated by the bank's product and service offerings (see above).

It logically follows that the bank stands to make less money on smaller accounts, because:

  • Depending on the jurisdiction and associated regulations, banks can't exceed a certain ratio of outstanding loans to deposits on hand (see: fractional reserve banking). Minimum balance fees encourage customer behaviors that increase the bank's "deposits on hand", thereby allowing banks to loan more money to customers and, consequentially, collect more interest.

    Without getting too "in the weeds" on the regulatory front, this is why you see minimum balance restrictions on checking and other "transactional" accounts vs. savings accounts and CDs, as fractional reserve rules generally don't apply to non-transactional accounts. Tangentially, this is also why banks will re-classify your savings account as a checking account when you execute too many transactions in a certain time period.

  • Even if you have a small amount of money in the account, they still have to pay the employees the same amount to answer the phones for you when you call, pay to keep the lights on in the branch that you'd like to visit, etc. As such, a minimum balance figure is set at a particular amount where they are likely to break even (and then some) on your specific account. A minimum balance fee charged when the total balance dips below this threshold helps offset the cost of having that account on the books when the bank can't exactly make enough money on the balance in the account to justify providing those services to you.

Depending on the jurisdiction in question, there are also certain regulatory figures a bank must meet to avoid fines/lawsuits/etc. and continue to make loans and, consequentially, generate revenue. Smaller accounts usually hurt the bank's goals in this realm, so they have this incentive as well to encourage customers to keep larger balances.

It's worth noting that, in 2021, there are banks that do not enforce minimum balance rules and will allow you to keep any amount, no matter how small, in an account. For the most part, these institutions generally operate mostly/all online and do not incur the same capital investment and operating expenses as a traditional brick-and-mortar organization would. They may also charge slightly higher fees for other services to recoup elsewhere what they would have charged as a minimum balance fee.

Investopedia has an easy-to-understand article on minimum balances.

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  • While all of the fractional banking explanation seems perfectly logical, I just fail to put it together with the fact that in Europe many banks charge negative interest for higher deposits. This means that they are pushing away the money of customers with the best money to effort ratio – Manziel Mar 27 at 17:36
  • "Banks generate revenue through various means, but largely from making loans to other bank customers and charging interest on top of the loan amount. " That used to be the case, but the ongoing zero-interest politics from both the US federal reserve and the ECB hs made this largely irrelevant -- which is actually a problem for lots of traditional banks. – Polygnome Mar 27 at 19:05
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Assuming you're talking about a low balance (non-negative) in a checking account...

I think it could be summed up by saying:

  • Not all banks have fees for low/min balances
  • Banks are a business, and have a lot of overhead expenses
  • If you don't have a decent amount of money in the bank or are not borrowing money, they can't make money off of you

So the reasons are likely:

  1. Because they can
  2. So they don't lose money from you
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Honestly? Because they can. If they are not making money by investing the money you give them to keep in your account, they'll find another way to keep their stock holders happy and to pay their higher-ups. The President of my bank made over 13 million last year.

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One reason is that, in the US anyway, abandoned accounts "escheat" to the state, that is, the money goes to the state for disposition. The bank would rather keep the money themselves, so they siphon off a bit at a time until there's nothing left for the state.

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It costs money to maintain your account. Financial statements must be generated, interest rates calculated, tax statements need to be sent out, etc. If you opened an account, and left no money in it then the bank is spending money on maintaining your account and not generating any money from the account. You could imagine if millions of people opened an account at a bank and put no money in those accounts, how much the bank would lose each month.

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