Minimum Balance Fees

Minimum balance fees are monthly deductions imposed by banks and financial institutions on accounts that do not maintain the minimum account balance required. Such fees are very common in the US and other countries. It may look insignificant at first but deducted monthly from thousands of bank customers eventually becomes a bigger amount and adds up to a bank’s revenue source. Such fees are automatically deducted from the account and have been a distress for people who are students, low income, lack of funds and improper cash flow.

On the contrary, there are margin accounts that investors can set up with a brokerage firm and borrow money from them to start trading. The borrowed money is to be repaid with interest, the securities themselves are treated as collateral, and if the trader fails to deposit or maintain the minimum balance, they are charged fees and interests. They may lose the account and securities that the brokerage firm will sell to cover up the losses.

In banking, such fees can be avoided by taking simple measures. At the same time, banks also understand that customers do not like to pay such fees and, hence, over time, have come up with offers such as low fees, zero balance accounts, and so on. In margin trading, however, the risk is bigger; in case the margin account suffers a heavy loss due to underperforming securities, the broker will give a margin call to the investor demanding more funds deposition or to sell off securities to pay the margin loan.

The rules defining the minimum balance fees are as follows -

• In banks and other financial institutions, firstly, there is a minimum opening deposit, generally $25 to $100, varying from bank to bank, that is required to open a checking or savings account.
• The account holder can make the minimum opening deposit manually or by transferring from other banks or financial institutions, even using a debit card, check or money order.
• Secondly is the minimum monthly deposit which some banks or credit unions ask their customers to make on a monthly basis to remain eligible for certain account benefits.
• In the case of minimum balance, there are mainly three types of it. The first one is the minimum daily balance, which, as the name suggests, is required by banks or financial institutions to keep a daily minimum balance in an account to avoid fees or penalties.
• The second type is the average minimum balance, banks calculate it by accounting the funds present in an account at the end of each day and dividing it by the number of days during the statement period.
• Lastly is the minimum combined balance. It is used when a person has multiple accounts, such as savings and checking accounts. The minimum combined balance is the amount of money the individual has each month in all his accounts.
• As far as margin trading is concerned, the rules are dictated by the Financial Industry Regulatory Authority (FINRA). The authority sets a 25% maintenance margin. Still, brokerage firms are free to set their maintenance margin, which is typically 30% to 40% of the total value of securities present in the margin account.

Here are two examples of minimum balance fees -

Example #1

Suppose Jack opened a new bank account in his local bank. Jack always kept a sufficient amount of funds in his account. Recently, when one of his friends asked for monetary help, Jack couldn’t refuse; in fact, he wanted to help him genuinely. Jack withdrew a large amount of savings he had in his bank account and gave it to his friend. Now, Jack only had $18 in his account.

At the end of the month, Jack received a notification from his bank stating that $9 had been deducted from his account as a minimum balance fee. He went to check with the bank. The bank officials told him that his account had a minimum balance threshold of $20, and when the balance dropped below it, the bank charged him with a $9 monthly minimum balance fee.

It is a simple minimum balance fee example. Jack immediately deposited another $18 to his account and brought his balance to $27 above the minimum balance threshold.

Example #2

Suppose Jennifer is a new investor; she wants to buy a stock but does not have enough funds. Upon research she finds about the margin account through which brokers lend money to buy securities on interest. The catch is brokers only offer half the amount. Suppose the securities are for $450. Jennifer has to deposit $225 in the margin account.

Now, in margin accounts as well there is a minimum balance fee based on the minimum deposit amount before the investor can start trading. Such fees are enforced by charging fees; if not paid or maintained on time, the broker has the right to make a margin call, sell securities to cover the losses and even close the margin account if the minimum balance is not maintained. It is a second type of minimum balance fee observed in the finance world.

To avoid fines regarding minimum balance fees -

• The foremost step or practice is to ensure that the account always has sufficient funds and is above the minimum balance threshold.
• People can open multiple accounts in the same bank. In such cases, the bank management often looks at the combined balance and saves the account holder from any minimum balance fees.
• Subscribing to direct deposit service which enables an account holder’s employer to pay straight to their bank account. This service comes with other additional features and may eliminate minimum balance fees.
• An account holder familiar with internet banking can go paperless; it not only saves them a lot of time and effort but also makes banks waive monthly fees.
• Looking for no-fee banks or no-fee accounts. It could be a tip for anyone looking to open a new or their first bank account.
• Opting for a student’s account when the customer is actually a student. Banks typically do not charge minimum balance fees on their student’s accounts.
• Performing proper research and reading about the bank’s rules and regulations to make one aware of the different types of fees and on what grounds they are imposed.