The Alexa Toolbar has some interesting headlines come across it. It draws on Reddit fairly often. The submitter for this article now has about 1600 net votes from describing their experience calling up a representative at a bank to contest their new monthly service fee.
It's clear that the representative could use some education in the making friends and influencing people department, but what is also revealed is a shocking dose of candid insight:
… The rep said it wasn't the bank's fault, and blamed the government. She said the federal government capped overdraft fees, and so they just “had” to raise these fees to “cover their losses” ….
Price controls make everyone worse off in the long run. Capping overdraft fees is a form of price control: the price a bank can charge a customer for the privilege of spending more than they're allowed to in their account. The government got involved as the result of backlash from something or other — people ask or even beg the government to get involved in matters! — and the profitable “frequent fliers” of the bank customer pool aren't quite so profitable anymore. So, the bank needs to find ways to make other customers profitable, such as the responsible ones who spend within the confines of their balance.
Prices like to move freely so they can arrive at the price that's best for everyone. With controls the price must settle somewhere outside of optimal, and other prices must adjust around the controlled price. Like $3 or $5 monthly fees where there were none before. Overall, there's not much that we can do about it. We can vote with our feet like the Reddit poster did, but even though he made the point that some other banks and credit unions haven't upped their fees yet, I tend to side with the bank rep:
… The rep got a little anxious, too, when my wife asked about the procedure for closing our account, and actually started arguing with my wife, saying that it was pointless to move our money because “other banks and even the credit unions are going to do it too!” ….
Whether the additional cost comes in the form of a monthly fee or something else, the cost will show up. The overdraft income was gone with the stroke of a pen (and a whole bunch of yea votes). Now we all adjust.
Debit card processing doesn’t cost the banks as do credit cards. So why did the banks charge similar rates? The banks still make money even at $0.21 plus five basis points of the order total. The transaction cost I read is about four cents. Banks have very little risk with debit but they charge like a risky credit card. That’s wrong and many merchants would agree with me.
Since the Dodd-frank with durbin amendment only affects banks with $10 billion plus in assets, smaller banks and credit unions are exempt. There’s no financial reason other than greed to charge a monthly bank fee.
These changes came into place to divert money and powerful influence away from these big banks. If you don’t want price controls, then I am all for not bailing out big banks when they make irresponsible choices. If banks served their customer needs rather than their own greed, we may never have had to be in this situation. We bail out bank of America and they want to charge the same people $5 a month to help pay for executive bonuses… Wtf?
The saga will go on, government apply restrictions and companies continue to device brand new strategies to earn more.
In this constant saga let’s all consumers device new plans to avoid new fees. Whether by switching banks or hanging behaviors.
Citi employed a scorched earth policy – charge all ‘low balance’ accounts $20 a month.
I’m surprised the rep in the story even cared about the closed account – one of the nice benefits (from the bank’s perspective) is that the responsible money is leaving the bank so the people that are left are more likely to get hit with fees. More fees, less administration!
Voting with your feet (or dollars) is exactly the right thing to do.
It’s not that expensive to offer basic account services (checking, savings, debit card, etc.). Debit cards in particular are still quite profitable. (The Fed figured that the banks’ actual costs were in the range of 14 cents, but they’re allowing the banks to charge 24 cents.)
The issue is that banks can only make ordinary profits on a service like debit cards, and banks have gotten used to making extraordinary profits.
It’s true that government caps on prices have limited utility, but the solution is not to give up. The solution is to bring market forces to bear. But for that to work, you need to have an actual market with a level playing field. And for that to to true, you’d need to break up the Too Big to Fail institutions.
They may give excuses, but it really seems like a cat and mouse game to try to extract money from customers in different ways. I get that they want to be more profitable, but as a consumer we don’t have to put up with it as long as there’s one competitor with a better price structure. I wonder how much they’re counting on a high perception of switching costs by customers, hoping that they’ll just accept the fees and deal with them.
Thanks for your insightful comments everyone!
Sun: My (smaller) credit union is getting squeezed by recent regulations as well. Some things may apply only to bigger banks but other things, like requiring people to opt in for overdraft protection, cost institutions small and big.
Philip: I wasn’t meaning to say that voting with feet/dollars is the wrong thing to do, but that it’s going to be difficult to escape the added costs resulting from the price controls. Some banks may hold out longer than others, but they’ll show up somewhere, somehow. One has to balance the cost/time of switching.
Also, who is to decide what kinds of profits are “ordinary” and “extraordinary”? If it’s anything but free market forces, then it’s a price control.
> cost institutions small and big.
It doesn’t cost you anything to have less opt-in overdraft protection. Lamenting is also not a cost to the banks. How banks have to adjust to new laws is not our problems. Banks had plenty of time to figure out a new strategy with opt-in overdraft protection. Banks also had plenty of time with the Doff-Frank w/ Durbin amendment.
If the business environment changes, you adjust or die. Why is it any different for banks?
Personally, I don’t think you’ve convinced me as to why price controls would be negative for consumers in the long run. I advocate for consumer protection because the banks do not look for their own customers.
Fees are inevitable. I try to keep a good relationship with my banker so that I can get fees reversed whenever possible if they hit my account. -Sydney
No, no. I’m sure price controls are going to work out great for everybody THIS time.
Just because price ceilings have mucked things up throughout history doesn’t mean Washington isn’t on-target here. Amirite?
Banks have no money of their own. Their business is built on their customers money. If a person is unhappy with the service the best way to deal with it is close all their accounts and move all their money.
Its always such a back and forth.
Overall, I think some actual stability would be best for both banks and the people. This constant fight is keeping businesses and consumers very nervous.
Why would you blame Washington when regulations are a reaction to misbehavior by the financial industry? Do you think we would be in such a financial hole if financial services like Goldman Sachs who lobbied to increase leverage and decrease liquidity? It is greed that drive these businesses versus actually looking out for their own customers.
I have thought about moving all my accounts from BOA…. but I probably will not. Right now, it is so easy for me to do my banking. Everything is tied into our accounts and the hassle of changing and re doing everything is just not worth it to me.
“…they just “had†to raise these fees to “cover their losses”… Isn’t this the very same reason why BofA will be charging debit card fees? Looks like big businesses are blaming it on the losses, unfortunately, we are paying for it.
The banks have done the studies and people like you, who are tied in with BillPay and Direct Deposit, are less likely to move. Some customers would rather pay the monthly fees than make a switch.
Its really not that hard to make a switch. We moved over to PerkStreet and get 1% cash back on all our debit card signature purchases. We get 2% back if we keep the $5k minimum. We got enough cash back this month to make the switch worth it. 🙂
Banks make money every time you go into debt.
I suggest you watch Money As Debt:
http://www.youtube.com/watch?v=Dc3sKwwAaCU
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