This bank is eliminating all fees from its checking and savings accounts — why you should tread cautiously

Discover DFS, +1.79%   is eliminating fees for its deposit accounts — including checking, savings, money market or certificate of deposit accounts. But consumers looking to avoid fees should think twice before signing up, experts say.

Consumers with a Discover Bank account will no longer be charged the myriad fees that can come with a bank account including those associated with:

• Monthly maintenance

• Checkbook orders

• Replacement debit cards

• Insufficient funds

• Excessive withdrawals

• Stop-payment requests

Some of the accounts still come with minimum balances upon opening — consumers must have $2,500 to open a money-market account or CD — but consumers won’t be charged a fee if their account at some point dips below that amount, said Arijit Roy, Discover’s vice president of deposits.

The fee-free initiative builds on Discover’s “First Fee Forgiveness” program that rolled out last year, which automatically waived the first eligible banking fee a consumer incurred each calendar year. Roy said the program is designed to help build “trust and engagement” with customers.

Studies have shown that the average American household can spend as much as $155,000 over their lifetimes in financial, bank and investment fees. In 2018 alone, U.S. consumers paid $11.5 billion in bank overdraft fees.

Americans spend a lot on bank fees — but it’s not the only thing they should consider

It has become easier to find a bank or credit union that waives the fees on its bank accounts in recent years. Roughly 41% of banks offer a free checking account, up from a low of 37% in 2016, said Greg McBride, chief financial analyst at Bankrate. The rate is double for credit unions. Still, it’s a far cry from 2009, when a whopping 76% of banks offered these accounts.

However, fee-free savings accounts can have lower interest rates, said Brian Karimzad, co-founder of personal finance website MagnifyMoney TREE, +0.36%  .

Discover’s checking account doesn’t offer interest, but does come with 1% cash back on up to $3,000 in debit card purchases each month, which can add up to a maximum of $360 back annually.

The company’s online savings account currently holds an annual percentage yield of 2.10%, while its 12-month certificate of deposit (CD) carries a yield of 2.50% and its 5-year CD pays out 2.85% interest. (These rates can vary, the company said.)

‘There’s such wide variation between account offerings. It’s really incumbent upon consumers to take their time and think about how they’re going to use the accounts and how it will meet their needs.’

—Christina Tetreault, senior policy counsel at Consumer Reports

The average savings account pays 0.10% interest, while the average 12-month CD pays 0.66% interest, according to the Federal Deposit Insurance Corp. However, some online banks offer savings accounts with APYs up to 2.80%.

Consumers also need to weigh factors such as the convenience of bank branches or a mobile banking app’s ease-of-use. Discover, for instance, operates as an online-only bank without traditional, brick-and-mortar branches.

“There’s such wide variation between account offerings,” said Christina Tetreault, senior policy counsel at Consumer Reports. “It’s really incumbent upon consumers to take their time and think about how they’re going to use the accounts and how it will meet their needs.”

Consumers could still face fees even with Discover accounts

There is one fee consumers may not be able to avoid entirely: Out-of-network ATM charges.

“ATM service providers may impose a fee,” Tetreault said. “So even if a bank account or prepaid account truly has no fees, consumers can get tripped up by out-of-network fees.”

Discover itself won’t charge an ATM fee if a consumer withdraws money from an out-of-network ATM, but the third-party bank will typically charge for that transaction. ATM fees have risen 53% on average over the past decade.

Discover Bank customers have access to 60,000 fee-free ATMs nationwide, the company said.

Axos Bank gives customers free access to any ATM in the U.S. and reimburses fees charged by ATM owner for various accounts with the bank. Radius Bank similarly offers unlimited ATM fee rebates. Meanwhile, Alliant Credit Union has more than 80,000 fee-free ATMs across the country.

Shares of Discover are up 4.93% over the last three months, whereas the Dow Jones Industrial Average DJIA, +0.94%  and S&P 500 SPX, +0.95%  are up only 0.92% and 2.20% respectively.