In the retail banking war, a new battle has erupted. This time, it’s over fees. Financial institutions everywhere are slugging it out with consumers, competitors and Congress, with fees emerging as an increasingly critical lever impacting profitability.
Monthly account fees are going up. Fees for replacing lost cards are up. Wire transfer fees, up. Money orders, up. Fees for certified checks, up. There are more conditions to waive fees. Customers who want paper statements must now pay fees. New mobile deposit fees are on the way.
Fees, fees and more fees. It’s all about fees.
The banking industry faces income pressure from multiple directions — a bad economy, a weak lending environment, Reg E, the Durbin Amendment. Financial institutions feel forced to explore an unprecedented range of new fees, from some that are tame and mild, to others that sound a little absurd.
“Banks are going to raise existing fees and institute new ones,” predicts Alex Matjanec, co-founder of MyBankTracker, a consumer-education website. “It’s all part of this push to get back lost income.”
Last year, a Pew Charitable Trusts study found that bank customers could potentially incur 49 different fees on a typical checking account.
And there isn’t a financial institution anywhere willing to promise that they won’t be introducing new- or higher fees in the near future.
“The sad but honest truth is that free checking was supported by interest rates and fees. Both those options are not available to banks now,” said Hank Israel, partner at Novantas.
“They have got to make up the income some place,” Vernon Hill, founder of Commerce Bank, told the NY Times. “I think we will see a lot more fees.”
“Banks may try a spectrum of charges — even for good customers.”
— Consumer Reports
Starting with increases in monthly account fees. Last year, BofA quietly raised the cost of its MyAccess checking account to $12 per month, up from $8.95. Citi’s basic checking product jumped from $8 to $10. And Chase started charging $12 to many customers who previously paid nothing at all.
Consumer Reports predicts that megabanks will lead in the three-way tango between financial institutions, their competitors and consumers. Consumer Reports says that big banks will continue to experiment with new fees and increases, while small institutions sit on the sidelines waiting to see if they should follow suit or woo angry customers by offering more competitive deals.
Financial institutions are responding to the dynamics of this fee-strained market with a range of different strategies. Some have deployed relationship pricing models pushing consumers to consolidate accounts. Other banks are shoving credit cards at consumers hand over fist, believing they have better margins with credit vs. debit cards. And banks will continue to do what they can to force consumers to electronic channels. If that means introducing new conditions that trigger fees, so be it.
Consumer Reports warns that banks might even try presenting new charges as a perk, not as a fee. They note TD Bank, who offers customers $1 off their monthly charges for switching to online statements instead of printed ones.
Banks Can Innovative… When It Comes To Fees
There are many critics who deride the financial industry as cowardly and anti-innovative. Not true. All it takes is a little income pressure, and whammo! Banks are willing to try anything, even a $5 fee on debit cards.
“Banks are adamant that they have been transparent about the price increases.”
— NY Times
“Banks are turning to all sorts of fees that fly under the radar,” notes Eric Dash for the NY Times. “Everything, it seems, has a price.”
Here are some examples of the creative new fees banks are gambling on.
Closing Account Fees
Some banks are now charging customers fees for closing an account too soon after opening it. US Bank and PNC charge $25 if it’s closed within 180 days. Chase tinkered with a $25 fee for accounts closed within 90 days, but dropped it in December 2011.
Teller Fees
For a while now, BofA has charged online customers for branch transactions. PNC will start hitting customers with a $3 fee for using a teller to transfer money.
Loan Payment Fees
HarborOne Credit Union in Brockton recently started docking borrowers $9.95 to make a loan payment with a credit or debit card. In the telecommunications industry, Verizon couldn’t even get away with a $2 fee for a similar service.
Online Bill Pay Fees
Wells Fargo charges $6.95 a month for online bill pay with its Value Checking account. After so many years where customers grew accustomed to free online bill pay, will they swallow new charges?
Card Replacement Fees
BofA hits customers for $5 when they need replacement debit cards — $20 if you want rush delivery (and who doesn’t?).
Savings Withdrawal Fees
BofA charges $3 for every savings withdrawal over three in a month, unless you keep $2,500 with them in savings. Other banks have introduced what they call “Excessive Withdrawal Fees” on savings- and money market accounts.
Mobile Banking Fees
A study by Pricewaterhouse Coopers found that most consumers in the UK would be willing to pay £10 ($15) per month for mobile banking services. Mercantile Bank of Michigan in the U.S. already charges customers $4 per month to view pending transactions on an iPhone.
Mobile Deposit Fees
US Bank charges $0.50 per check. Expect more banks to roll out fees for remote deposit capture as they introduce the service.
Pay By Phone Fees
According to Matjanec at MyBankTracker, banks also will start charging customers for paying bills over the phone as opposed to online. PNC started charging between $2 and $3 for teller-assisted transfers made over the phone. BBVA Compass charges $3 for this service, too.
Minimum Balance Fees
Citizens Bank now charges money-market customers $50 if their account balance falls below the minimum. Similarly, BofA charges a $25 fee to customers who dip below minimums on premium-checking accounts.
Check Cashing Fees
TD Bank unit will start charging noncustomers a $5 fee to cash checks at any of its branches. Chase and BofA both charge $6 to cash checks for non-customers.
Paper Statement Fees
Bancorp South now charges a $2 monthly fee if you get a hard copy of your statements mailed
Banks vs. Credit Unions
An analysis performed for Consumer Reports by Informa Research Services found differences among the more than 1,000 financial institutions it tracks. For example, among those that charge a monthly fee for noninterest checking, the average was $10.27 at the largest 10 banks, compared with $7.45 at banks with less than $4 billion in assets, and $6 at the 10 biggest credit unions. The fee was higher ($6.91) at credit unions that had assets below $4 billion than at the largest ones.
| Comparison of Fees | Banks | Credit Unions |
|---|---|---|
| Monthly fee for non-interest checking | $10.27 | $6.00 |
| Minimum balance to waive fees | $1,115.97 | $500.00 |
| Monthly fee for online bill payment | $6.95 | $0 |
| Foreign ATM fee | $2.21 | $1.07 |
| ATM surcharge | $2.96 | $2.79 |
| Insufficient funds fee | $34.48 | $27.82 |
| Stop payment fee | $31.09 | $19.43 |
| Overdraft fee | $34.48 | $27.82 |
Source: Informa Research Services
Overdraft Fees
Banks have lost billions since Reg E went into effect. In 2010, banks only earned $30 billion in overdraft income, down sharply form the record profit of $37.1 billion one year prior.
That should explain why U.S. banks jacked overdraft fees up $2.50 in 2011. According to a study by Moebs Services involving 2,500 banks and credit unions, overdraft fees hit $30.00, up from $27.50 in 2010. Moebs said the fee hike was the largest one seen in 30 years.
“We went to banks themselves, and first thing they told us was that the regulatory cost is so onerous they have to offset it with higher fees,” Moebs said.
Some banks, like BofA, felt the situation with overdrafts had become so challenging that they completely nuked their overdraft programs altogether. Now BofA requires customers to link another account (e.g., credit card or savings) with sufficient funds if they want purchases made in excess of their available checking balance to go through. That’s right: customers can no longer “go into the red” at BofA — no more overdraft credit. For this pass-through “payment assurance” service, BofA only charges $10 per use.
That decision hit BofA hard. According to research from Credit Suisse, BofA lost an estimated $3.3 billion in overdraft income in the first year following Reg E’s implementation (and that’s on top of $2 billion in annual interchange revenue lost to Durbin).
The Congressional and consumer backlash against overdrafts isn’t over, and things could get even more difficult for banks on the fee front. The FDIC, for instance, is recommending banks not charge overdrafts on smaller items, so cardholders won’t get dinged $30 for a $4 cup of coffee.