Illustration by James Yang.
But even for smaller banks, fees are becoming a reality as the industry scrambles to recoup billions lost to tough new government regulations and tougher economic times. Last year, about $7 billion in previous bank income—with another $5 billion expected in 2012—was lost due to new consumer protection rules, effective July 2010, that prohibit financial institutions from charging fees for overdrafts on ATM or one-time debit card transactions unless a customer opts in for overdraft coverage. Nearly one in ten customers overdraft at least once a month.
Meanwhile, large banks are expected to lose an additional $8 billion annually from the Durbin Amendment that took effect last October, which cuts in half—from 21 to 24 cents per transaction—the interchange fee they can charge merchants when customers make a debit card purchase. For now, smaller banks (with less than $10 billion in assets) can still charge the previous 44 cents per swipe, but even they are losing $329 million annually, reports CardHub. And billions more were lost in a troubled economy that curtailed lending, spiraled loan interest rates to historic lows, and resulted in lackluster deposits.
Like any business, banks need to make money—especially the major players, public companies whose shareholders expect them to turn a profit … somehow.
“We want banks to be healthy, right?” says Nessa Feddis, vice president and senior counsel of the American Bankers Association (ABA), the trade group representing the industry. “There are a lot of 401(k) retirement plans and pension funds that invest in banks—nurses, teachers, retirees who don’t want banks to lose money or just break even.
“Banking services are a great product that people tend to take for granted, but there are costs associated with them,” she adds. “Debit cards, ATMs, statements, websites for online banking, and compliance with dozens of regulations. There are phones, computers, salaries, and benefits for thousands of employees. All of this costs money. If there were no fees, you wouldn’t have improved services. I don’t think anyone expects Apple to give its products away, but would we have iPhones and iPads if Apple wasn’t able to make money?”
The question now facing banks is how best to make money. Or more specifically, from whom?
Expect fee hikes for a safe deposit box and premium services such as expedited bill paying and person-to-person payments. Customers will be pushed toward online and mobile phone banking, offering both fees and incentives. Predictions also call for higher penalty fees for overdrafts or failure to keep a minimum balance, less favorable loan rates as banks try to increase the difference between what they pay to borrow and charge to lend it, and encouragement to use more expensive credit cards and prepaid debit cards over traditional debit cards.
Banks are always experimenting with new ways to apply fees. And many plans take into account how fees impact customers they want to keep and those they’re willing to lose. Despite the hoopla about rising bank fees—cited as the most common reason why customers switched banks this year—banks know that most customers stay and take it. Less than 10 percent of customers switched banks in 2012. That’s only a hair above the normal amount; it was about 9 percent in 2011 and nearly 8 percent in 2010. That’s because many customers can escape most, if not all, fees. Especially if they’re wealthy. “A few months ago, Jamie Dimon, CEO of JPMorgan Chase, told a group of shareholders that unless a customer had $100,000 in bank accounts, loans or other services, that customer was not profitable to him,” says Moebs. “And he wasn’t lying.” Still, that’s a far cry from the one in three Chase (and other bank) customers who, at any time, have less than $5,000 in deposits and investments. What can you do to avoid fees if your name isn’t Trump or Rockefeller?
Open your eyes. Avoid paying fees by knowing them. While you’re not about to tackle book-long disclosures statements, fees are usually outlined on your bank’s website. Before paying, it’s wise to ask your bank for options to avoid service fees; trouble-free customers who don’t overdraw can sometimes get a pass—especially when reminding their bank of their past good standing and patronage. It doesn’t hurt to mention that their bank isn’t the only game in town.
Study the fine print. Carefully read everything that comes from your bank, especially what appears to be “junk mail”—that’s where fees are often announced. Use fine-print finesse in offers that may say “free” in the headline but note accompanying fees in the small print. A recent credit card offer from Bank of America promised zero interest for a full year on balances transferred from other cards. Buried in the fine print was a four percent “transfer fee.”
Make yourself a more valuable customer. It may not be pleasant to hear this, but if you’re a one-account customer—especially one with a small balance—it costs your bank more to keep you than to let you leave. (It costs big banks, with greater overhead, between $300 and $450 a year to operate a customer’s checking account. Conversely, it costs $170 to $240 for community banks and credit unions, notes Moebs.) Customers in the best position for all types of fee waivers are multi-taskers who, in addition to having checking and savings accounts, also have a credit card or loan (mortgage, home equity, or car) from that institution, says industry watchdog Greg McBride of Bankrate.com. So it may be wise to get a Visa or MasterCard from your bank, if only to use it sparingly. Many predict that banks will dangle more carrots for such “deep relationship” accounts, which likely include waived fees on other everyday services.
Beware of high-fee services. Although wealthy customers are most valued, some banks actively court those with lower incomes. Reason: They’re most likely to need short-term loans, prepaid debit cards not tied to a bank account, and other “alternative” products. True, short-term loans from banks are an improvement from those offered by shady “payday lenders” (which can amount to repaying thousands on loans in the hundreds). But even at a “name” institution, a $1,000 short-term loan can cost $100 or more in fees. Prepaid debits cards, too, are riddled with user fees that can total $20 per month, according to a recent Bankrate study. But expect banks to push their use—no matter your income—since the Durbin Amendment capping credit card processing fees does not apply to prepaid debit cards.
Serve yourself. Banks save when you don’t need face time with their employees. But as more banks charge for that personal touch, there’s a flip side: They’re offering discounts for do-it-yourself customers who opt for online and mobile-phone banking, and to those who “go green” by forgoing mailed statements that require personnel and postage.
Stay alert—with alerts. Another DIY incentive: More banks now allow you, at no charge, to sign up for email or text message alerts that warn if you’re falling into a fee-infested danger zone, such as dipping below a minimum balance. So ask about this little-publicized service. It may not be volunteered by some banks.
Make a move. If your bank won’t back down on fees, you can always flee. Some options to consider:
Credit unions, which like banks are fully insured, consistently have lower fees and are less likely to charge for everyday services. Why? Although subject to many of the same regulatory pressures that have prompted banks to raise fees, credit unions’ nonprofit status means they are exempt from certain taxes. Many credit unions have volunteers on their board of directors, side-stepping the uber salaries that big banks pay their poobahs. “And rather than having to generate profits for shareholders, whatever profits they generate are returned to members—through favorable interest rates, lower fees, and more product offerings,” notes McBride. Find credit unions in your area at culookup.com or asmarterchoice.org.
Smaller regional and community banks don’t garner the “switch-here” headlines enjoyed by credit unions, but they charge lower fees than their bigger brethren. “Community banks offered free checking before it became fashionable,” says McBride. “Many have been run by the same family for generations and they built their identity by serving customers without nickel-and-diming them with fees—and remain reluctant to impose the fees charged by larger banks.” Find local community banks at icba.org.
Online banks, with no branches and the associated costs, can afford to nickel-and-dime less. Leaders include Ally, ING Direct, KeyDirect, CIT Bank, and EverBank. A recent study finds many paid a higher interest rate on savings accounts than their brick-and-mortar counterparts and just slightly less than a five-year C.D.
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