Where do banks get off, and why they feel so entitled (when we are in fact the ones lending them money)
I get a weekly reminder from one of my favorite personal finance websites about bank fees that are associated with my personal banking. As someone as interested in personal finance as I am, I am sometimes ashamed at what I am looking at. It is a regular series of ATM charges, monthly account charges, check re-order charges, interact e-transfer fees, and so forth. Then of course, some of you may also experience none other than overdraft charges, interest charges, banking abroad fees and so on. It’s gets exhausting, and more importantly, expensive. It begs the question: Why do we pay so much to our preferred lending institutions, and why does it seem like we are getting nothing in return?
The typical bank in North America claims it takes about $250 per account to cover costs associated with maintaining standard services for customers. Standard services have come to be known as ’regular’ for a bank or savings and lending institution are: ATM’s, branch or retail locations, call center for telephone support, accepts mail deposits, mobile banking, on-line banking, relationship managers, telephone banking and in some cases video banking.
The North American Banking System
How banks operate is that, for years, they have accepted deposits from accountholders like yourselves, held a minimum ‘reserve’, or percentage of all of its holdings combined, and acted as a lender for the rest of the money to borrowers who repay the borrowed money with interest, which is profit for the bank. This is why banks are known as both savings and lending institutions. As we know though, household saving rates are at an abdominally low rate, and banks generally tend to prefer accounts with large balances, and so they can increasingly lend out more and more, and make more and more money in interest rate charges. However, amidst falling interest rates and record-low saving rates, the banks need to find new ways to make money off of low-balance customers – and hence the bank fee comes into play. (Many of you might have been told by your preferred lender that at a certain balance fees become waived). This we get. But from there, is there a limit to how much a bank can theoretically charge us, and pile on fees? (Because it seems like it is a tad out of control)
Paving the Way to Plastic, Fees + More Profits for the Banks
The date of importance in understanding the banks right to fee us to death seems to be some events dating back to the late 1970’s and early 1980’s. It was a time of deregulation. People began to get more power, and banking companies could now start to decide to define some of their own policies, instead of merely following government mandated policies. Up until about 1980, there were limits on how much banks could charge customers. Then, in 1978 new policy was introduced that allowed banks to charge interest fees up until the limit in which the state they were headquartered, and thus deregulation began. As banks have more choice of diversification and products they offer, they begin to offer more services, and move from a business of ‘handling money’ to one of lending money to make money off of interest paid by borrowers. Cue the savings and loan crisis. However another key date to remember is a landmark supreme court ruling that occurred in 1996: Smiley versus Citibank. What began as a lawsuit over fees the customer disputed over 2 Citibank accounts she held ended up being won by Citibank, as the supreme court deemed fees were interpreted as interest charges in Section 85. This, in everyday language meant that bank’s could literally charge as much or little as they wanted when it came to bank fees.
As banks grew, they faced the changing nature of banking – from handling money to lenders, and how to be profitable off both groups. Small accounts weren’t profitable for banks anymore, however it was what they always did. And so, in attempts (and success) to achieve increasingly huge profits, fees for everything were introduced for everything. From this perspective, it is understandable now why we have so many fees – a bank, like any business wants to make profit. However looking at this from the customer’s perspective, unless you get partitioned off in group #1, you’re kind of screwed. And the age old issue, will group #2 ever make it to group #1 if you’re not giving them a break anywhere, fees cutting into any savings they might be able to start putting away. And while the bank was busy changing their business model, how does this actually affect the customer, and what value are they inherently getting in their account holding right now. It is almost like they are betting some just stay with them if only for avoiding the inconvenience associated with switching because for starters, for most banks, the customers are getting nothing that looks like a ‘benefit’. In a survey conducted by Bankrate.com, only 39% of the 247 banks in the United States offer truly ‘free checking’. For the majority, reward for customer loyalty is a completely foreign language. And as banks seem to think it is okay to replace loyalty with loyalty points (yes! $40 in free groceries for the year) one has to wonder where value can actually be had?
Credit Unions: A Possible Answer
About a year ago a cause named ‘Bank Transfer Day’ came into a lot of publicity in the wake of the worldwide Occupy movement. Bank Transfer Day directly highlighted the difference in cost paid and value received from the customer’s perspective when comparing services rendered by both banks and credit unions. With little surprise, credit unions won on almost every level, from costs associated to maintaining the account, to a customer-focused organizations, and thus people started to stray one by one and then in droves out of the banks and into the welcoming hands of the non-for-profit, customers-first credit unions. The movement gave support to and promoted the exodus out of the banks and into credit unions. A year later, credit unions continue to see fed up customers ditch their fee-laden accounts and pick up membership in community banks or local credit unions. The question is though, does everyone have to leave the banks for them to get the idea that customers are worth paying attention to?
There has been some legislation introduced, after a US GMO study found in 2006 that (shocker!) people don’t understand credit cards and interest charges were looking out of control (cue: housing and credit crisis). In 2007 some reform bills were introduced to regulate the industry, and now, in the wake of the housing crisis, it looks like we may be headed to a more regulated environment as the only means to protect the customer. While it may have been a better model for individual companies to step up and pave the way in creating a truly customer centric environment where the organization is properly managed, the business is run and customers are important again, this type of outlier model takes great leaders, ones with courage to blaze out, and I’m not sure we see a lot of those in the board room any more, and more and more we are seeing the type of leadership and organizational structure that is important to customers in the credit unions that we are now taking our money to.