Banks have been the focus of criticism since the end of the Bush Administration, when a few institutions received bailouts from you and me. The US government provided more than $700 billion to help stabilize banks, and many have since recovered – that bailout worked – but rather than adopt favorable lending policies toward the taxpayers who bailed them out, they’ve gone in a different direction. That’s also because the government capped a few of the banks’ favorite cash cows, including overdraft fees and merchant debit transactions. Recently, consumer anger reached a fevered pitch, culminating on Bank Transfer Day, during which millions of dollars were transferred from for-profit banks to non-profit credit unions. Now there are actually a number of new fees that consumers have to contend with, which seems to beg the question – are banks that greedy, or do they function like a traditional business?
It’s almost too easy to criticize banks. After all, they played a significant role in the collapse of the housing market and our subsequent economic woes; they almost always react in knee-jerk fashion toward earning reports; and most CEO compensation is tied to short-term stock performance. As a result, many executives turned a blind eye to the risks of their real estate products as they looked forward to record bonuses. And yet, the banking community really does have a lot to worry about when it comes to earnings. The new overdraft and debit card transaction fee caps may cost the industry as much as $12 billion dollars.
Let’s look at how bank fees and interest rates impact one another. According to a report by the financial consulting firm Oliver Wyman, it costs most banks between $200 and $300 a year to maintain a checking account. These costs cover staffing, overhead, and FDIC insurance premiums. Until recently, banks could offset these costs with fees collected from overdrafts and merchant account transactions. Today, banks are expected to earn, on average, between $85 and $115 in fees per year, per account. But that’s hard to do if the customer maintains a low balance. When that’s the case, a bank may actually lose between $85 and $185 per year, per account.
Imagine you were a bank facing a reduction in revenue. You have three choices to offset those losses. You can A) Close your doors, B) Introduce new products and services, or C) Raise fees and lower interest rates on money kept on deposit. What would you do? Unfortunately, many banks quickly chose Option C. In years past, most of us might have accepted the increases – no questions asked. That’s no longer the case. As you may recall, Bank of America abandoned its $5-a-month debit card fee in late October amid a firestorm of criticism driven by news stories and an outpouring of negative sentiment. So what can Bank of America do to meet customer needs and satisfy the expectations of its shareholders? Once again, their answer seems to be Option C – raise fees and reduce interest rates on deposits.
You might not have realized it, but the average interest rate for deposits fell to 0.74% from 0.8% during the first six months of 2011. This translated to a savings of almost $1.5 billion a month, industry-wide. Some banks have also adjusted their minimum deposit requirements. For example, you formerly may have avoided monthly fees by maintaining a modest account balance, but you may soon be required to keep as much as $15,000 on deposit at certain banks. A few banks are also testing charges for lost debit card replacement – $5, or $20 for rush delivery. For those of you who make deposits via your mobile phone, you may soon receive a $0.50 fee for every transaction. Or, if you withdraw too much from your savings account, you could incur an excessive withdrawal fee of $9. Finally, some banks will even charge you to speak to a teller – an average of $1. So much for new “products.”
If you’re encountering new fees, you should know that you have options. Bank Transfer Day has put a spotlight on credit unions and how they can save their members a considerable amount of money. According to the Credit Union National Association or CUNA, 650,000 people transferred more than $4.5 billion to Credit Unions in the month leading up to Bank Transfer Day. Until next time, I’m Thomas Fox for Cambridge Credit Counseling.