Service Charge

A service charge is a fee a bank or financial institution imposes on a customer for maintaining an account or using a specific banking service. Service charges are how banks generate fee-based revenue to offset the cost of providing access, processing transactions, and maintaining customer accounts. Most Americans encounter these charges through monthly maintenance fees on checking accounts, overdraft fees, and ATM fees.

Think of a service charge like a cover charge at a venue: you pay it to access the space, regardless of what you order.

Common Types of Service Charges

Service charges appear under different names depending on the service they cover. The most frequent types are:

• Monthly maintenance fee: A flat fee charged to keep the account open, typically ranging from $5 to $15 per month. Many banks waive this fee if you maintain a minimum daily balance or set up direct deposit.
• Overdraft fee: A fee charged when a transaction exceeds the available balance and the bank covers it. These typically run $30 to $35 per occurrence.
• ATM fee: A fee charged when you withdraw cash from an ATM outside the bank's network. The ATM owner charges a surcharge, and your own bank may add a second fee on top.
• Wire transfer fee: A fee charged for sending funds electronically to another bank. Domestic wires typically cost $15 to $35 per transaction.
• Foreign transaction fee: A fee charged when you use your debit card in a foreign currency or through a foreign bank, usually 1% to 3% of the transaction amount.

How Service Charges Appear in Accounting

For businesses, bank service charges are classified as operating expenses. They appear in the income statement as part of general and administrative expenses. Accountants typically record them in a dedicated "Bank Fees" or "Bank Service Charges" account. Because banks debit these fees directly from the account, they show up on monthly bank statements and must be recorded during the bank reconciliation process.

Bank service charges on business accounts are generally tax-deductible as ordinary and necessary business expenses in the year they are incurred.

Regulatory Changes Affecting Overdraft Fees

In 2024, the Consumer Financial Protection Bureau closed a longstanding loophole that allowed large banks to charge overdraft fees without disclosing the effective interest rate on the short-term credit being extended. The change required banks with more than $10 billion in assets to treat overdraft coverage either as a loan product subject to Truth in Lending disclosures or cap fees at a set amount. This significantly reduced the profitability of overdraft programs at major institutions.

Overdraft and non-sufficient funds fees historically accounted for about two-thirds of fee-based revenue at large banks, according to Consumer Financial Protection Bureau data.

How to Minimize Service Charges

Most service charges can be reduced or eliminated by choosing the right account structure. Maintaining a minimum required balance often eliminates monthly maintenance fees entirely. Using in-network ATMs avoids ATM surcharges. Linking your checking account to a savings account for overdraft coverage converts a $35 overdraft fee into a smaller transfer fee. Online banks and credit unions frequently offer accounts with no or minimal service charges, particularly for customers who use direct deposit.

Sources:

• https://corporatefinanceinstitute.com/resources/wealth-management/service-charge/
• https://www.accountingtools.com/articles/bank-service-charge-expense
• https://thecollegeinvestor.com/bank-accounts/service-charge/
• https://www.ebsco.com/research-starters/business-and-management/understanding-bank-fees