Budget Basics
No Saving Grace. Big banks face consumer backlash from big fees
By
Thomas Kostigen
Marketwatch
Thursday, January 24, 2006
The amount may not sound like a lot, but for most Americans it is: the average family income is $44,000 per year and the average savings rate in the U.S. is less than 1% of after tax income. That's a lot less than $2,500.
But Bank of America isn't alone in fetching more money from consumers. Banks reap about $40 billion per year off consumer service charges, double the amount they took in 10 years ago, according to the Federal Deposit Insurance Company.
These charges hit the poor a lot harder than the rich because the amount is a greater portion of their income.
Take this example from one Bank of America customer in Massachusetts: A housekeeper, she just found out about the $10 per month assessment. "I went into the branch to complain but the lady [teller] told me that's just the way it is; 'we are in business to make a profit' she said. I was shocked. I closed my account and I told my sons to too and my boyfriend."
Add up the numbers and you'll see why: Between the four of them that's almost $500 per year in bank charges alone -- a lot of money for one household to pay for giving a bank its money.
She said she's going back to her local bank: "One day they'll realize they gave up their bread and butter."
A spokeswoman for Bank of America said in an e-mail response to questions that a number of customers in New England who had been given temporary fee waivers on certain Fleet One accounts were informed that they may now incur a monthly maintenance fee and excess withdrawal fees. The spokeswoman said that brings those customers in line with other Bank of America customers.
According to Bankrate.com, smaller banks typically charge less in fees. And big, national banks are finding it harder to compete. So instead, they are turning to squeezing consumers on everything from returned-check charges to over-the-limit credit lines, ratcheting up interest rates to 30% for some consumers in some cases.
It's no wonder bankruptcies are skyrocketing. Bank of America this week reported its profits fell greater than expected because of a rash of consumer bankruptcies.
When banks start to worry about profits, they tighten their lending practices and create more stringent guidelines for borrowers. That can lead to more bankruptcies.
Citigroup, which last week reported poor earnings, showcased this point. The giant blamed "net interest margin compression" for its shortcomings. Net interest margin is the difference between what banks pay to borrow money and what they can earn when they lend it.
With short-term interest rates rising and long-term interest rates stable, there isn't as much of a spread for banks to make profits. Less profit and the more a bank begins to worry; the tightening-up cycle continues.
Don't big banks get it? Instead of shunning or trying to extract more money from their base of consumers, they should focus more on relationship banking. But they don't.
Others, though, see customer relationships are key to success. Wal-Mart, the giant retailer, wants to open up bank branches in all of its stores. Big banks are lobbying against this, but sooner or later it will happen. And the reason big banks are lobbying against this is that they know Wal-Mart has a loyal consumer base and will likely charge far less in banking fees. (After all, it has the prospect of a store purchase to offset these consumer costs.)
The affinity in banking is changing. Big name brands are becoming associated with negative terms. In the United Kingdom a huge backlash against big banks occurred when a report showed ATM fees were ripping off the poor. Legislation was passed to curb abuse.
Here in the U.S., the temblor of complaints is just beginning. But it's easy to see how that could grow into a quake.
When consumers are faced with bankrupting rates, they either go bankrupt or they flee. With interest rates rising and many homeowners carrying variable-rate mortgages, their monthly payments are destined to rise. With credit-card debt saddling consumers with higher interest rates, the cost of credit is high.
Banks are teetering on the edge of a consumer-payback abyss. They are bracing their position with more ATM fees, maintenance charges and higher account minimums. But all that does is create a high wire act.
It doesn't have to be this way. All big banks have to do is remember where their bread is buttered.
