Archive for Banking Fees
There are always unintended consequences to government interference in the marketplace, and that’s no exception with the banking industry, as recent fees were added to checking accounts at Bank of America (NYSE:BAC) and Citibank (NYSE:C) in order to make up for lost income from recent government regulation added to the industry.
Unfortunately, consumers, for the most part, don’t understand that if income is forcibly taken away through government interference, then it will have to be made up somewhere else, or there wouldn’t be a banking industry.
So when people were socked with overdraft fees, for example, or high interest rates on their credit cards, they rebelled via the government, pressuring lawmakers to interfere so they wouldn’t have to pay these additional fees.
Now new rules will stop much of the overdraft fees collected, while banks will need to change their credit card practices as well.
I don’t mean by this that the banks shouldn’t have communicated better concerning the overdraft fees or credit cards, but it was still the responsibility of people with accounts to manage their financial affairs, and not spend money they didn’t have in their accounts.
The point is, banks are in business to be profitable while offering a variety of services. If revenue is blocked up in one area, they’ll simply transfer it to another, where consumers will have to pay for it. Nothing is for free, and if consumers want to use a bank, it’s not going to be for free … someone has to pay for it.
Essentially what happens with government interference in the markets is they stop up one revenue hole, which then causes a bank or financial institution to find and open up another. In the case of checking accounts, that’s what’s now happening. One way or another, banks have to make a profit in order to continue operating. They’re not non-profit organizations.
While taxpayers in America were rightly angered by the bailouts of the banks, those that were poorly run indeed should have been allowed to fail so those that kept operational costs under control could have survived and grown, creating a healthier financial base for the country. Since that wasn’t allowed, the focus was turned to any type of unpopular bank practice like overdraft fees in order to vent some of consumers’ anger toward them.
The bottom line is if government interference cuts off a revenue stream, the consumer eventually will pay for it by adding fees to former free or low-fee services. That will probably increase at other banks who have to make up for the revenue lost from unpopular revenue streams, specifically those being regulated by the government.
I labeled this as folly because it’s inevitable that it happens, and a healthy banking system must of course generate revenue. No matter how many holes the government attempts to plug up, the consumer will end up paying for it in the long run, making the cost of doing business with banks – for them – even higher.
Unfortunately for consumers, they’re not going to understand that their anger and rants simply transferred what they paid from banking from one type of fee for another. Unintended consequences.
First Bank of Wal-Mart (NYSE:WMT) Rising Out of the Banksters Ashes?
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It’s too bad Wal-Mart (NYSE: WMT) wasn’t allowed to enter into the banking industry, as it would have quickly shown the other poorly-run banks how to do it right and for far less.
In 2007 Wal-Mart has applied for a banking charter and was refused after the banking industry lobbied the government to not allow them to compete with them; something they are surely sorry for now, as tons of new regulations are attempting to do what Wal-Mart would have otherwise done through free market capitalism – forced them to lower prices.
Wal-Mart is for the most part a well-oiled capitalist machine, and now that they have their system close to being perfected, they can just about enter any competitive sector or market and compete in it quickly and efficiently.
This is especially important because they’re now doing an end-run around the bankers and offering their own financial products which are far better and less expensive than the banks are offering.
One example is with prepaid debit cards. Serving what many identify as the unbankable, Wal-Mart has offered them a great way to use their capital at a very cheap price. As of this writing, a Wal-Mart customer buying a prepaid debit card pays only $2. Compare that with the overdraft fees of up to $35 a pop from banks and you can see why they’re afraid of Wal-Mart by this one product alone.
Look at what the banks have been doing in contrast with credit cards alone. Now you get to be a great customer of theirs and get rewarded with an almost 30 percent interest rate for the privilege of using their cards. And this is during difficult economic times and after being bailed out by those very customers they allegedly serve.
Like other Wal-Mart competitors, banks and financial institutions don’t get them and what they see that they don’t: huge opportunities to serve and make money from the under-served. In the case of the prepaid debit cards, Wal-Mart has sold over 2 million of them since February 2009, which amounted to over $2 billion in transactions. This doesn’t take into account their other financial services like check-cashing, paying bill services and money transfers.
Wal-Mart is doing in financial services what it always has done the best: make money from a large number of transactions rather making more from fewer transactions. With most the opportunities and growth lying with those that don’t interact with the banking system at this time, Wal-Mart has tapped into a great market that will offer them huge rewards in the future because they understand what they need and want and are willing to provide it for them.
The reason Wal-Mart will revolutionize this market is the big banks can’t operate without using secret and/or added fees that would significantly boost their bottom line. The customers Wal-Mart is reaching out to can’t afford those huge fees and so aren’t marketed to by the banks. But Wal-Mart knows how to meet their financial needs in a way the customer can afford and Wal-Mart can make a profit, and I’ll bet it won’t be too many years down the road when the non-chartered First Bank of Wal-Mart does as much financial business as some of the largest banks in the world. I hope they do and I think they will.
If Wal-Mart had been granted a banking charter, a lot of the nonsense we see today wouldn’t be happening, such as attempts for the government to control the pay of banking executives, bailouts, regulations on products like credit cards and overdraft fees for accounts.
Wal-Mart would have done what capitalism does best, and that is disciplined their competitors through their competitive expertise, forcing the prices of the services they offer down or experience an exodus of their customers to do banking with Wal-Mart.
This is going to be a lot of fun to watch as the banking industry will continue to be made to look bad overall as Wal-Mart shows them how to do it in the financial products area they’re allowed to compete it. How much longer will it take for public pressure to make the politicians allow Wal-Mart to compete for their banking dollars?
It was inevitable in the current economic climate and banking bailouts that consumers would vent their anger toward the banks on anything that frustrates over doing business with them, and that’s the case with a series of class action lawsuits filed against Bank of America (NYSE:BAC), Wachovia (NYSE:WFC), U.S. Bank (NYSE:USB), JPMorgan Chase (NYSE:JPM) and Citibank (NYSE:C) over overdraft fee policies.
These lawsuits have been consolidated in the United States District Court for the Southern District of Florida in Miami, and will be heard by Judge James Lawrence King.
Although I don’t have any sympathy for those who want free loans from their banks, which an overdraft fee addresses, I do think it’s a bad practice and unwise for the banks to continue to assess these fees in the midst of the extraordinarily difficult economic time we live. That’s just begging for a bunch of lawsuits, which they now have on their hands.
In some press releases, the most recent announcing the consolidation of the class action lawsuits, they use inflammatory rhetoric to make the banks out to be these evil, bad guys. But the problem with that is the majority of consumers don’t overdraft their checking accounts, and so why should others be treated differently when they do, when they’re being irresponsible.
For example, in this press release from lawyers, they’re attempting to demonize the overdraft practice by using examples of consumers who do it several times and then being hit with $35 overdraft fees for each transaction over a very short period of time. Why should that be something to sympathize with when it’s not only poor management, but irresponsible behavior, as they know they’re doing it, and the idea that they’re clueless as to being assessed fees is dubious at best, and in many cases outright dishonest. It’s like getting ticketed in a no parking zone or allowing the meter to run out. They know it, they’re just hoping they can get away with it.
On the banks’ side of it, they should be sure to communicate to their customers about overdraft fees and the inclusion of an overdraft part of their checking account, which keeps them from embarrassing situatons where their bank cards are declined in public places after making some type of buying decision.
In the end though, the only ones that may win in this will be the lawyers (assuming there is a victory), as those with overdraft fees won’t be compensated for much in a class action award or settlement. And if they do have high fees, what does that say about the continual use of their account without having any money in it, while the rest of us manage our finances successfully?
I’m leery of this because many people know they can make accusations against the banks which will be sympathized with during the existing economic difficulties. In normal economic times consumers would wonder about these people who think they can borrow money for free without compensating the banks, which is what an overdraft essentially is: a loan.
Of course the problem with the banks is they’re struggling to generate profits, and these fees have been a large part of generating income over the years.
But with the acceptance of government bailout money, they should have known that this would happen, and made at minimum temporary efforts to cut back on overdraft fees until the economy turned around and people began to forget how they were soaked to save the banks.
My conclusion in this is both sides are at fault, and while I can’t see the merit of these class action lawsuits, I understand the frustration behind them, whether it’s a faux frustration or not.
Either way, the lawyers know they have a great chance at a big pay day, and their aggressive press releases show they are pushing hard to sway public opinion to the negative side in order to get a strong settlement with the banks to keep more negative public sentiment from growing toward them.