Editorial Policy

Goodbye to Cheap Banking? You Bet, Say Experts

Marcia Frellick

October 19, 2011

Last week, Wells Fargo began testing its $3 monthly debit card fee in four states, becoming the latest in a growing line of banks to test or implement such fees.

That follows Citibank’s announcement that starting in December, customers with its mid-level Citibank account will be charged $20 a month if they drop below a minimum balance of $15,000 in their combined accounts.

Previously, account holders had to carry a minimum balance of $6,000. Before Citi, it was Bank of America introducing a $5 monthly fee for using debit cards that will start next year.

So are free services at banks going the way of the complimentary airline meal and bags checked for free?

You can bet on it, says Brian Riley, senior research director at TowerGroup.

Fees such as those for using a debit card have always been there. They’ve just been subsidized, he says. Now that financial reform measures have cut banks’ income in other areas, such as what they can charge for overdrafts or collect for swipe fees, income has to come from somewhere. Banks have a responsibility to their investors. So it’s more a shifting of fees, rather than a wave of new ones, he says.

Banks that used to rely heavily on interest income are now looking to make it up with fees.

A study by R.K. Hammer consultants in Thousand Oaks, Calif., found that fees for the first time this year will overtake interest as the payment card industry’s largest income generator, making up 52.7 percent of total revenue. In 2007, that split was 61 percent from interest and 39 percent from fees.

New fees coming
“Once you start taking 70 percent of the revenue out of interchange [fees] you have to look at fees for things like replacement cards, which might not have been charged before. You can also expect things like a card issuance fee,” says Riley.

“On the card I use personally, I get charged a fee every time I use my debit card out of the country – 1 percent (of the transaction) or $5. That will certainly make me think twice about using it,” Riley adds.

He says banks are also starting to charge if a statement gets returned because you moved and forgot to tell them. His bank — a community bank — now charges $5 for that.

“Also, I’ve always had a line of credit on my checking account. Now there’s a fee for having the line in the first place — $25 a year. Then it gets nastier. Every time I use it I’m charged $5 per $100 for a transaction.”

Industry experts have also pointed to higher charges on ATMs, cash advance fee increases and charges for paper statements as potential revenue sources. Meanwhile, expect debit card rewards programs to continue to disappear.

Free checking accounts will also be harder to find. While three-quarters of checking accounts were free two years ago, fewer than half are free now, says Bankrate’s 2011 Checking Account Survey.

Comparing banks difficult
The good news from a consumer perspective is at least these banks are being upfront with these fees, that you know with advance notice that you will be paying a certain fee for a certain service months from now, says Susan Weinstock, director for the Safe Checking in the Electronic Age Project for Pew Charitable Trust.

But if customers decide to change banks because of these fees, it’s extremely difficult to compare what other banks are offering. Directors of the Pew project are calling for more transparency and simpler disclosures.

“Let’s get something out there so people can comparison shop,” Weinstock says. “You’d hate for a consumer to say ‘I’m fed up with my bank because of these fees’” and then go to another bank and find out they would have been better off staying put because they didn’t understand the new bank’s terms.

A study by U.S. PIRG, the federation of state Public Interest Research Groups, found even researchers have trouble getting simple fee information from banks.

For its 2011 report “Big Banks, Bigger Fees: A National Survey of Bank Fees and Fee Disclosure Policies,” staff made inquiries at 392 bank branches in 21 states.

Fewer than half (38 percent) of branches complied easily with the researchers’ requests for fee schedules that are required to be made available by the Truth In Savings Act. After two or more requests, the total complying was 55 percent. Nearly one-quarter (23 percent) of branches surveyed refused to comply at all. Others provided piles of brochures, the report said.

Pew has been lobbying the new Consumer Financial Protection Bureau to require banks to have a one-page disclosure statement, similar to the Schumer Box required on credit card accounts that lays out the terms and fees for checking accounts on their websites and at their branches.

Consumers would know at a glance in a standardized format, for instance, what a bank charges for returned checks, closing accounts, overdrafts and stop payment orders. Pew researchers found in a survey this year that the median length of a checking account disclosure document is 111 pages. CFPB could help consumers navigate the market, they say.

“We believe that is their role. Nine out of 10 consumers have a checking account, so it just makes sense that this is a topic that they should take on,” Weinstock says.

Riley notes that the bank fees affect segments of the population differently.

“If you’re at the top tier– $150 (thousand)-and-above income — you’ll probably benefit from these changes,” Riley says, because you’ll likely be able to keep the minimum among various accounts to avoid the fees. It’s the lower-income customers who will feel these fees the most.

Still, Riley doesn’t see a mass exodus from banks, particularly because it can be difficult to untangle your accounts and switch automatic deposits and bill paying. But consumers have their limits, he acknowledged, and will leave when they’re pushed too far.

“There will certainly be a tipping point. When fees start going above $100 a year, it’s going to cause people to take a look at it,” he says.