[StBernard] Why are bank fees on the rise?

[Westley Annis]

Why are bank fees on the rise?
Created 10/08/2009 - 11:35

When a bank's income from overdraft fees is higher than net income, eyebrows
tend to rise. That's the case in nearly 45 percent of banks, according to
the research firm of Moebs Services.  By the end of this year, total
overdraft fees collected is projected to exceed $38.5 billion, and the
President and some members of Congress are fighting mad. The Obama
Administration has been vocal about its desire to create a mammoth watchdog
agency to oversee many of the details of our financial lives, including bank
fees. Now two bills, one in the House, and another one introduced by Senator
Chris Dodd (D-Conn) will seek - among other things -to force banks to get
the customer's permission before charging an overdraft fee. Meanwhile,
critics ask. whatever happened to personal responsibility?  

How high are bank fees?
 
Overdraft charges are nothing new, and certainly anyone with a checking
account should be aware of them and how to avoid them.  Moebs Services says
that this year, the average overdraft fee has bounced from $25 to $26,
higher at Wall Street banks.  At banks with more than $50 billion in assets
the average overdraft fee is $35.  
 
Whether the fed should protect us from ourselves or not is a matter of
opinion. Still, it does seem like a good idea to ask a simple question. why
are bank fees on the increase?   One banking official sees it this way:
 
"It's a balance sheet problem. Banks have to generate revenue to make up for
the losses in other areas," he says.  Most banks are publicly traded
entities, not unlike WalMart or Macy's.  They have to return value to their
stockholders, and with revenue plummeting through low interest rates and
high mortgage defaults,  they have to replace the income just like any other
business that hopes to keep its doors open. "Banks look at a negative
account balance as a short term unsecured loan. There's a risk attached.
Banks have the right to charge for a loan." 
 
Taking a critical view of his own industry, this banking official added that
banks aren't particularly friendly, and he wouldn't be surprised if
regulation did occur.  If that happens, he says, a lot of consumers who
aren't currently getting adequate information might be able to benefit from
increased government involvement.  Speaking for himself, he spends a great
deal of time with new accountholders making sure that they understand what
transactions will trigger fees and how to avoid them. If there are
regulatory changes, he would like to see the fees disclosed in layman's
terms so that bank customers don't end up underwater.
 
Whatever your attitude about this subject, when customers overdraw their
accounts, there is a real cost to the bank, and the bank has to:
 
.                     Be able to recoup the expense
.                      
.                     And have a meaningful vehicle to discourage customers
from overdrafting.
.                      
If banks cannot recoup the cost of overdrafts by charging the customers who
create them, they will have to make up the losses in other areas. That could
mean punishing the wrong customers, by paying lower rates on savings
accounts and CDs.
 
Even so, those who say we need a literal act of Congress to reverse the
trend of rising fees seem unconcerned about the fate of banks.
 
"People out there are getting whacked," Senator Dodd told reporters. "They
should have the right to say, 'Deny me the transaction.' "
 
In other words, Dodd wants banks to have to alert the customer that a
pending purchase will throw them into an overdraft situation.  It used to be
that banks refused to pay transaction if the customer didn't have the funds.
With the rise in debit card use, the sheer number of bank card transactions
has soared, and with it, the tendency to overspend available funds.  At some
point, banks began to pay transactions whether or not the funds were there
(up to a preset limit) and then charge for what amounted to a short-term
loan in the form of an overdraft fee. Dodd would like to see a reversal of
that trend, forcing banks to get permission to pay the transaction.
 
So, let's say you enjoy a lavish meal in a fine restaurant and attempt to
pay with your debit card, but your account balance is insufficient. Chances
are, the purchase would still be paid (within limits) and you'd later find
out you were overdrawn and hit with a bank fee for the privilege of
borrowing money. If Dodd has his way, when you attempt to pay from
insufficient funds you would receive a message alerting you to that fact and
giving you the option to "pay anyway" and accept the fee. You could of
course, find an alternate way to pay like using a credit card or cash or .
washing stacks and stacks of dirty dishes in the restaurant kitchen.
 
How can accountants help clients avoid high bank fees?
 
The obvious answer is, advise them how to keep better track of their money
so they don't overdraft.
 
Bank account holders can opt out of overdraft protection, meaning, if they
don't have the money, the check or debit will not be honored. Or, they can
go elsewhere. Money-rate.com [2] allows consumers to shop around for a
better deal.
 
Al Manbeian, founding partner of GPS [3] foreign currency brokerage firm,
comes from years of experience with some of the nation's top financial
institutions. According to Manbeian, banks have some room to negotiate. Like
any business, they need to compete in order to attract and maintain strong
clients. That means clients who are coming from a position of financial
strength should be able to ask for better rates, on everything from
residential mortgages to business working capital lines of credit.  
 
For customers who are less financially strong, Manbeian still recommends
they try to negotiate with their current lenders to bring their rates down.
Or, they can look at alternatives to commercial banks. Some institutions are
able to charge lower fees because they have less of an overhead burden. GPS
is a prime example. Through a combination of economies of scale and
streamlined overhead, they are able to offer clients an attractively priced
product set for foreign currency exchange transactions. CPAs with clients
who deal in foreign currencies can help clients avoid excessive fees and add
value to those clients by connecting them with a banking alternative like
GPS.
 

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