Why do banks require minimum balance to avoid a fee?

Abstract

Large banks in the United States waive their monthly account fee if depositors maintain above a certain minimum balance in their account. This article analyzes the conditions under which banks benefit from applying this pricing strategy. I find that the minimum balance strategy is profitable when banks possess only moderate market power. In contrast, under strong market power, this strategy is less profitable than charging monthly fees to all depositors regardless of their deposit amount. Common ownership of banks reduces the gains from the minimum balance pricing strategy. Interest rate competition together with fee competition eliminate these gains.