It wasn’t hard to foresee that banks were going to start hitting retail customers with more fees. As we wrote when Bank of America tried introducing a $5 per month fee for debit card use:
Consumers should brace themselves for a brave new world of lots of bank fees. Bank of America is no doubt hoping that it will be a price leader and the other major banks will copy its move. Now that banks can borrow at pretty close to zero, cheap sources of funding, like interest-free checking accounts and float aren’t as valuable as they once were. When I lived in Australia, it was pretty much impossible to have a relationship with a bank and pay less than $25 a month for it. The US banks are moving in that direction.
The New York Times tells us that banks are in the process of imposing a host of new charges. For instance, TD Bank will charge $15 for an inbound wire transfer. A replacement debit card will cost $5 at Bank of America. Citibank is increasing the fees on a basic checking account by $2 a month; Bank of America, by $3 a month.
The reason (or rather, justification) is the impact of the assault on interchange fees:
Banks can still earn a profit on most checking accounts. But they are under intense pressure to make up an estimated $12 billion a year of income that vanished with the passage of rules curbing lucrative overdraft charges and lowering debit card swipe fees…
Put another way, banks would need to recoup, on average, between $15 and $20 a month from each depositor just to earn what they did in the past.
Notice how the Times promotes the idea that banks are justified in trying to preserve their profit levels. As various commentators have pointed out, the financial services industry had become too large relative to the real economy and is largely extractive. The interchange fees were grossly disproportionate relative to the cost of providing the service. Because the banks can no longer run interchange like a cozy oligopoly, it’s supposed to be OK for them to fleece the customer elsewhere? Remember, banks are more heavily subsidized than any other industry. To think of them as private companies is misleading.
Let’s look at more of the bank flattering logic:
It costs most banks between $200 and $300 a year to maintain a retail checking account, from staffing branches to covering federal deposit insurance premiums. In the past, the fees banks collected from merchants each time customers swiped their debit card or overdrew their account covered much of that expense. Banks offered “free checking” to the masses as a result.
But the economics have drastically changed over the past two years. Income earned on deposits has fallen, while the revenue gained from fees has plunged by as much as half because of the new regulations. Today, according to Oliver Wyman, banks are expected to take in, on average, between $85 and $115 in fees a year per account — making it especially hard to turn a profit on customers with low balances.
So…because the Fed is providing funding at negative real interest rates, banks no longer value deposits and float as much as they used to. The contention is that banks are now having trouble making the supposed $200 to $300 a month they need per checking account. But the article conceded earlier that banks make money on most checking accounts.
And can we take this $200 to $300 a year figure at face value? Anyone who has worked in large corporations knows that cost allocations are an art form. As one of my clients said, pointing to a chair, “What do you think that costs? I can make it cost whatever you want it to.”
In addition, have you notice how branches have been sprouting like weeds over the last few years? The density of bank branches in Manhattan has gone up considerably, well in excess of the increase in population. So if bank branch economics suck, maybe it’s due to an having too many branches with too little throughput in each, and not the service pricing. And there is some confirmation of this theory:
And nearly every major bank has embarked on a cost-cutting campaign, eliminating branches and staff. After a 15-year expansion, the number of branches has fallen almost 1.4 percent to 98,202 from its peak in 2009, according to SNL Financial.
But the banks are relying on customer complacency, and even tell you how to retaliate:
Banks may also be betting that consumers will not notice the quiet creep of existing fees. As Richard K. Davis, U.S. Bancorp’s chief executive, told investors on a recent conference call: “We’ll see if our customers complain and move, or just complain,” he said.
This, by the way, is the same Richard Davis who made it clear he regarded breaking rules as no big deal. It’s time for customers to tell banks executives what they think, not simply by moving your account, but also severing other relationships with your bank, such as credit cards. In most businesses, the guiding principle is “The customer is king.” Time for long suffering bank customers to demand better treatment.
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I think you are missing something. The inter charge fees are only part of the problem, the elephant in the room is the Fed and ZIRP. Zero interest rates pose all sorts of issues for banks. They take deposits invest them at higher rates, keep some of it to offset costs as well as earn a profit and hopefully pay out some interest to their customers. When rates go to zero banks have no spread to play with and instead have to resort to fees. Frankly I’m surprised the money market mutual fund industry hasn’t instituted a monthly fee since zero interest rates leaves nothing left to pay management fees and expenses. I’m all for free markets and choices but Hoenig is right, the Fed needs to raise and normalize rates to say 1%, then some of the need to nickel and dime bank customers goes away and
we stop transferring wealth from savers to debtors.
You miss the key points made in the article:
1. Banks are still making money on most checking accounts. Note that even this is misleading (treating checking accounts as a stand alone product). Banks seek to cross sell as many products as possible when opening an account: a credit line, a credit card, a mortgage, retirement account/brokerage services, a savings account. Customer profit is more important than per customer profit by product
2. The article argues the fee hike are in response to the efforts to rein in interchange fees, not ZIRP.
And aren’t many of these banks profiting from the interest rate arbitrage, even at a low level; they fund themselves via the Fed at the 0-.25% range, then flip that to bonds paying even 2-3%, for guaranteed, but low, profit.
Or am I misunderstanding that play?
I didn’t see the reply and wound up saying down below some of the same things you just said Yves, the difference is we look at the facts differently. We both acknowledge banks leverage off the savings accounts and checking accounts to offer higher profit products, but unless consumers realize this fact and build it into their pricing behavior it doesn’t matter.
I don’t think banks are “justified in trying to preserve their profit levels”, but they are justified in trying to do so.
We as consumers can try to escape, by moving to other banks or alternatives.
Nota bene:
Duplicated block quote at the end of the piece.
There is a really annoying sorta bug on my end. When I clip something to the clipboard, it does not seem to take about 25% of the time. Sometimes I catch it, sometimes I don’t. That is the big reason for screwed up links in Links.
Is it that it doesn’t take at all, or that only part of the text is copied?
Additionally, it’s always been true that allocating costs is part art, but banks have been doing that for years, so it’s best to focus on the what has changed aspect. What has changed is increased costs and lower interest rates, so while I’m no fan of the banks the argument has merit here. That said, consumers should always go with the best product offered at the best price, and the big banks are not it.
One additional point, banks in my opinion are not opening a ton of branches to open up savings accounts or checking accounts, what they’re after is wallet share. They believe that by having the most presence they’ll get you with other services and snag customers who are too lazy to get the best deal. Ever notice that the CD’s and mortgages at the local bank are often the least competitive? I’ve also noticed that once open the branches have few tellers and are usually staffed more with sales people than service people.
Costs may be higher in part because banks continued far too long to offer checking. It may have been profitable – does checking generate any income other than overdraft fees? – but at what cost? The industry created MERS to reduce costs associated with MBS. Did the industry resist creating debit card infrastructure, which would reduce costs associated with checking, because overdraft fees were so easy?
ATM cards were not resisted, probably because they absolutely multiplied the velocity of capital. In fact, as a customer of BofA since the 80s, all ATMs were free for some number of years (I forget). For illustration, before ATM fees, there were no liquor store ATMs. It was only after (IIRC) WF and BofA went to (fake?) war to establish fees for using the other’s machines that ATM fee businesses were able to come into being.
You forgot the other thing that changed: Mgmt compensation levels.
Can you explain why — from a business perspective –Ken Lewis of BoA made $53,000,000? And although I don’t have the other top management compensation figures close at hand, they’re all well over $10,000,000. How does the bank business model allocate that kind of compensation, and what are those bank boards smoking that they are signing off on this nonsense?!
True story: in a conversation with a WF branch manager, I learned that when she assessed credit for customers, she didn’t have access to WF Financial info — in other words, if that customer had loans for a boat, car furniture ( even from another division of her own bank) UNLESS they told her, she had no way to know.
How is that a ‘business model’?!
What viable business would structure itself with multiple divisions, none of which knew what the others were doing?
That suggests the checking accounts were simply the gateway to sell other services, many of them involving debt. The checking accounts are the tail in Pin The Tail On The Donkey – an appendage made to appear to be important that is hardly the guts of the matter.
Wouldn’t a genuine business person start cutting costs with some of that bloated compensation? Wouldn’t a real business person ask whether they still had a viable business model, and if not — then adapt to shifting realities?
What other business sector in the US pays exec compensation in the $50,000,000 range, wreaks economic havoc by creating credit (based in part on fraud enabled by its own bizarro, inefficient processes and procedures), bleats to taxpayers to cover their lost bets and fraudulent conduct, and then — when Congress finally gets around to removing one of their cash cow, legacy bennies — has the effrontery, while paying obscene bonuses, to snivel that they can’t cover the costs of checking accounts?
At this point, I find it impossible to think of megabanks as businesses. If they were legitimate businesses, they could not behave this way.
IMHO checking accounts weren’t simply the gateway to selling other more profitable services involving debt. Of course banks offered free checking to get customers in the door and buying loans, mortgages, pension ideas, CDs, etc. And they didn’t have to lose too much money on checking because they were getting overdraft fees.
Checking was the lynchpin to selling the bad lieutenant in the debt product police force: credit cards.
Interesting assertion that banks fund their payment transfer services by charging merchants for swipes and by charging customers for overdrafts.
A bank attracts deposits by offering deposit security and payment trasfer services. Some interest would be nice too but basically just keep my money safe and help me pay without cash and I’ll give you access to my cashflow.
The costs of providing these basic services are recovered through successful investment of customer deposits. If a bank cannot recover the cost of providing these fundamental services through returns on investment then it can fire the banker who is screwing up and hire another one.
Of course you can’t fire the banker – he’s related to the governor. Alternatively a bank can reduce costs and seek additional sources of income, maybe even increase fees. Reduce costs? Checking dominated payment transfer services for many years. It requires an expensive infrastructure that can easily be abused. You’d think that banks would have dumped checking as soon as card technology became available, gone to debit cards around 1980 at the latest.
They didn’t. Overdraft fees were no doubt important sources of income then. More important however was the role of checking in nudging consumers into prefering credit cards as the payment transfer alternative to cash. As long as there were only two payment transfer alternatives to cash – checking and credit cards – then consumers would prefer the alternative that allowed us to write one check a month and reduced our accounting chores at home: credit cards. All we had to do was pay up on time and the credit card was almost as good as debit card. The clincher was the credit rating schill – pay up on time, keep your rating good and you’ll be able to get a mortgage easily.
Changes in the law are somewhat irrelevant here. The bankers shot their foot off when they created subprime. They discredited the credit rating argument for credit card use leaving them with no argument to defend checking. Debit card use expanded to replace checking as the prefered payment transfer alternative to cash. They tried to hide their failure by charging swipe fees and now they want to increase fees across the board. It’s easier to do that than to fire bankers and eliminate checking entirely.
The costs of providing these basic services are recovered through successful investment of customer deposits.
That used to be true, but ZIRP has depressed interest rates all along the yield curve.
As a former bank treasurer I can tell you that Checking account balances are considered “core” deposits and can be invested in maturities of up to 5 years. Even back in the day when the fixed leg of a 5-year swap paid 5.00%-6.00%, the vast majority of checking accounts were extremely unprofitable due to low average balances and high transaction costs. The monthly service charge only re-couped a portion of that loss.
Today that 5-year swap will earn less than 1.50% so the banks are clearly losing their shirts and desperate to find alternate sources of revenue.
The business model is busted. And although ZIRP is helpful in some areas, it is costly in others.
Agree the bankers shot themselves in the foot.
Here’s a great link to a story about a young Iowa company that hates credit cards and is charging a flat $0.25 fee per money transfer.
With the number of swipe transactions and online cc use, there was clearly a huge biz opportunity to outperform credit cards. Looks like this company may have cracked it:
http://www.businessinsider.com/this-28-year-old-is-making-sure-credit-cards-wont-exist-in-the-next-few-years-2011-11
Note their success in figuring out smartphone payments.
Thanks for the very interesting link. IMHO Dwola’s success depends on it’s relationship to the ACH system, which is I believe the system on which participating institutions process electonic transactions using IBAN and SWIFT information. There should be no obstacle to using the system to directly debit retail purchases and thereby making credit cards and checking finally obsolete. Obstacles however exist: those who contol the system don’t want it to be used as a utility. Ultimately Dwola is as vulnerable to the utility as any other party that seeks to exploit the utility to its advantage.
Oh, you make very good points.
It is worth noting, however, that it appears Dwolla can select among financial suitors.
Also, the banks may have antagonized a lot of small businesses; just put your ear to the ground and hear the disgust over how much the banks are extracting. I loved the quote where the Dwollah founder explains he came up with the biz idea in response to the banks ‘stealing’ his money via the cc/debit transaction percentages.
But I suspect the ace in the hole is their cracking the Holy Grail of smartphone transactions ;^)
I sympathize completely with his disgust with credit cards. Again, credit cards would not have carved out their market share without checking, and without effective privatization of the payment transfer utility.
I can’t quite figure out how they’re going to crack smartphone transactions. Doesn’t the billing just re-route over smartphone accounts, avoiding ACH but giving the phone service provider a cut?
I think the parallel to MERS is interesting. With MERS the industry created a utility to serve its interests just as the industry has captured control of ACH, which should be treasured and nurtured as a public utility. The NACHA homepage indicates that it may have had a public utility culture until 1979, when bankers became the executives.
STate lines are difficult because bankers and their cousins gerrymandered the electronic payments map. European consumers and small business owners were similarly handicapped until the EURO. I believe that since 2001 Debit cards issued by EMU-based banks can be used in the entire EMU without incurring fees. THe EMU’s ACH is a public utility.
I have rationalized and moved my personal and business checking to a small local bank. Accounts are free with a very reasonable minimum balance. I also have free account at Schwab. Total bank charges and nuisance fees with b of a were approaching $1000 per year.
At some point it would be interesting to read your version of how a bank should operate rather than how it should not.
Banks locate branches the same way Mickey D’s or a CVS locates stores: to take advantage of local traffic and the resulting inertia. People tend to shop in the same places regardless of the name on the door. Once you get them in the habit of coming in, it is not a habit easily broken.
Now that people move fewer times than previously, siting the stores is more important than ever.
“In the past, the fees banks collected from merchants each time customers swiped their debit card or overdrew their account covered much of that expense. Banks offered “free checking” to the masses as a result.”
Really? I seem to recall that my first “free” checking account was a result of getting direct deposit at work. This was back when we didn’t use plastic for everything. And even now, “free” generally comes with a minimum balance.
The banks should be regulated public utilities.
Why are we even worrying about the fees?
“The banks should be regulated public utilities.”
Agreed, lambert.
Currently they are unregulated public utilities and the wealth required to keep them afloat appears to sink everything else, manufacturing (such as still exists,) retail, certainly most private citizens who haven’t become the owners of bank/s or bank holding companies.
The tail waggeth the dog a-way too much and this is contra natura. Such an argument should be easy to make for the right-wing clots who go on and on about arguments for and against various things from “Natural Law.”
Usura certainly defies any natural law that I’ve ever seen.
I didn’t realize my money was such a burden to the banks. I guess they want me to move it to a credit union, which actually pays me for keeping my money.
I had a good chuckle at the bank branch comment.
Where isn’t there a bank branch in a metro area? The only thing sprouting up faster than a Walgreen’s on every corner in this country is a bank branch kitty-corner to them, and additionally, one located in every grocery store.
Isn’t this counter to the internet age and everyone doing banking online anyway?
It would be interesting to look at the costs paying in currency cost a merchant. Assume for the sake of argument is a convince store, it needs a drop safe, and a surveillance system because a nickname of many of these establishments is stop and rob. Even assuming no security costs you need to count and take the money to the bank. It is not really clear that this costs less than an electronic transaction be it Debit or Credit.
The corollary of this is that every customer at a bank
has the option of using cash that they can withdraw
from the tellers window.
Go in and talk to the tellers,
ask them about their benefits and if they get enough hours
to obtain them. No one is going to dislike you for showing
sympathy with them and commiserating.
Paying cash to the small merchants in your community helps
them in many ways. It avoids the skimming off of percentages
from the credit card companies, it avoids the imposition
of debit card swipe fees on merchants or you, and it gives
them an alternate to begging for credit to make payroll.
If you are scared of carrying much cash, write checks.
Cash is patriotic. Plastic is for proliferate pushover pansies pretending that convenience trumps all.
Banks? What banks? We don’t need no steenking banks!
Lots of good points here, but I particularly like the notion that somehow the banks simply MUST continue to make the outrageous money they’ve “always” made – the NYT article reprints this nonsense as though it were revealed truth.
I realize this is a public company/shareholder issue WRT to profits, but out here in the hinterlands, we have long adjusted our profit projections to be way, way lower than the Good Old Days. (Which were nowhere NEAR the profit margins of the Banks’…)
We’ve also adjusted compensation across the board, including at the top of the company. Gone are the goodies and perks that a few years ago were de riguer for “executives.” That’s what small biz does, and I’ve noticed it at more than one company I’ve worked for over the past few years.
I guess those Italian leather belts favored by the Banksters don’t tighten like ours do.
And, I can report that yes, the TBTF institutions are spending money all over the country building branches and opening store branches. My company has built several just this year.
Not that the banks consider this an opportunity for anyone besides themselves – you should hear the caterwauling when the change orders come in due to poor planning on their part and/or the rushed nature of the drawings they have compelled the architects to produce. It’s like the end of the world for them to fork over 10% of the contract price ($50K or so). Isn’t that walking around money for a guy like Jamie Dimond?
(And they somehow think that any market west of the Misissippi is on a par with Mongolia in regard to wages, material costs, etc., and complain bitterly about the same throughout the job.)
This may be a dumb question but why are they building all those little banks everywhere? If small accounts lose money? If our average wage-earner is only making 25-30,000? If the bulk of these banks’ profits come from “investment” activity? If they’re actually, at bottom, mostly insolvent?
what happened to the days of earning interest on a savings account ! ? i refuse to even play the bank game anymore. i do not pay fees to any bank. wake me up when banks pay us interest again, like the old days, like normal times.
Kind of makes you want to start up a credit union, doesn’t it?
Bankers have been getting a little greedy lately. Just kidding: big-time banking has turned into a racket, state-sanctioned organized crime. They’ve pulled off the biggest robbery in history in the last couple of years, greater than all the robberies in human history put together. And they’ve gotten away with it.
Most people aren’t aware of it, but the mafia and cosa nostra didn’t make their biggest bucks on gambling and narcotics. They made it the the way the banksters do it, with loan sharking. And the banksters have become so proficient at that they can now bankrupt entire countries. They have set their sights high, and Greece was just for practice.
Carroll Quigley could have the last laugh after all:
“There really is a ‘world system of financial control in private hands’ that is ‘able to dominate the political system of each country and the economy of the world’ … This self-perpetuating group has developed an elaborate system of control that enables them to manipulate government leaders, consumers and people throughout the world … They are in the last stages of developing a World Empire that will rival the ancient Roman Empire. However, this new Empire will rule the entire world”
We are in grave danger.
BOA just charged me a $5 fee for each electronic transfer INTO and out of a savings account after reaching their limit of 3 per month. Called and raised hell, was told it was a federal requirement. Told the bitch I needed her name so I could ask my congressman about it. Put me on hold, came back and said it was a BOA rule. I said “rule me out,” be down in the morning to pull my 28K from savings.
A fee for a transaction that involves no BOA manpower involvement?