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.