Why New Bank Fees Are Here To Stay

Consumers have less power to dictate bank policies than they think.

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Outraged bank customers better have a lot of stamina, because the battle over new fees may only be getting started.

Consumers have won some gratifying victories against the financial industry recently, such as Bank of America's hasty decision last year to revoke its $5 monthly fee on debit card users, after howls of protest and mockery. In other industries, consumer revolts led to the rollback of unpopular new policies at companies such as Netflix and Verizon Wireless.

But it would be a mistake to conclude that consumers, newly empowered by social media, the Occupy movement and growing anti-corporate sentiment, have a newfound ability to dictate corporate pricing schemes. They don't. Wells Fargo, for example, is expanding its plan to charge a $7 monthly fee for checking accounts with balances below $1,500. Bank of America, unbowed by last year's debit-fee fiasco, is preparing to roll out new fees for customers who don't bank online or meet certain thresholds. Free checking may soon be as rare as $2 per gallon gas.

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Consumer advocates have complained about banks rolling out new fees even though profits are at the highest level in five years. That overlooks a couple of important points, however. For starters, profits at a few megabanks, such as Citibank and Bank of America, are still far below pre-recession levels, since those banks are still recovering from grievous losses borne during the recession. And policies at the biggest banks tend to set standards for the whole industry. Beyond that, many banks—plus their shareholders—are anticipating a sharp dropoff in profits as regulations that are still being written go into effect over the next few years.

It's also a myth that big banks will snap to attention if too many customers flee. In reality, banks don't mind losing certain customers, especially ones who keep a low balance and are hard to make money off of. The growing ranks of the "unbanked"—low-income people who can't afford to pay for banking services—is a legitimate problem, but that needs to be rectified by government policy that applies to all banks equally, not by the altruism of individual banks. Nobody expects automakers or clothing companies to give products away to underprivileged consumers, and banks are no different.

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Instead of consumer empowerment, The real trend people should pay attention to is the unbundling of services that lowers the basic cost of many things, but adds new a la carte fees that used to be covered in one overall package. This can benefit informed consumers who know how to get the best deal, but can also harm consumers who are lazy or have little leverage. And it's happening in banking, just as it already has in many other industries.

Airlines are a good example. According to the latest data from the Dept. of Transportation, the average round-trip ticket costs $361. That's only about two percent higher than the average airfare five years ago, when adjusted for inflation. But since then, the airlines have figured out how to squeeze new profits from baggage, food, choice seats and many other things that didn't always cost extra. Consumers gripe, but they pay---and also strategize about how to take advantage of low fares without paying the extra costs.

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In banking, free checking is the equivalent of an airline ticket that used to include a meal, checked bags and a bunch of other perks, all for one price. Before the 2008 financial crisis, banks made a ton of money from proprietary trading, securitization, overdraft fees, high credit-card interest rates and many other types of activity. That made it easy to offer checking accounts that included things like free ATM withdrawals and unlimited check writing, with no rules about how much business you brought to the bank or how much time you took at the teller window.

Banking is a different business today, with many once-profitable activities banned or curtailed. So it's no surprise that banks are unbundling free checking and starting to charge for things that used to be offered gratis as part of a broader package. To some extent, this could lead to better banking, with more transparent pricing and a fee structure that's more rational than it used to be.

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Instead of profits from one part of the industry subsidizing services offered in another, bank customers would basically pay for what they get. Limits on what banks can charge their most vulnerable customers would mean that less vulnerable customers pay a bit more. Banks would offer discounts to customers who make "bulk purchases," which in banking means consolidating all of your loans, credit cards and accounts at one bank. Consumers would have to work harder to follow bank prices and get the best deal, but that's the whole story of the Internet era. New companies might even spring up to help do it for you.

Right now, banks are in a messy transition to a new form of pricing. Part of the problem is a secretive approach toward new fees, ad hoc pricing and continued sneakiness by some banks. Wells Fargo, for example, won't say where, exactly, it plans to roll out its new $7 per month checking fee; customers have to check the paperwork that arrives in the mail to find out. Some banks still rely on questionable practices that seem designed to drain customers' accounts quicker than they realize, forcing them to incur overdraft fees. Other banks nickel-and-dime their customers by charging for things like use of a teller or phone calls to a live customer-service agent.

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This is all happening at a time when trust in banks is at a historic low, so every change tends to generate suspicion. The Obama administration's new consumer-protection czar, Richard Cordray, says he's investigating some practices, which could mean that even more rules are coming.

Banks may want to study how the airlines, which were also vilified for dunning their customers, have finally generated grudging acceptance of their a la carte pricing schemes. What the airlines did right was learn to publicize their fees up-front instead of burying them in the fine print, as some banks still do. It helps that airline fees have become more or less standardized, with the majority of carriers, for example, charging the same $25 fee for a checked bag. And a few airlines, such as Southwest, have tried to gain a competitive advantage by not charging as many extra fees and advertising that as a lure. That makes consumers feel like they have some choices.

A few banks seem to be heading in this direction. Bank analyst Meredith Whitney recently praised PNC Financial, for example, for its "Foundation" checking program that allows consumers with weak credit to maintain an account with no minimum balance, for $5 per month. Some regional banks and credit unions have resisted the new fees adopted by their bigger brethren.

Many other banks, however, continue to generate distrust among consumers, with pop-up fees designed to test how much pain bank customers are willing to tolerate. The experimentation will subside at some point, but the overall cost of banking is likely to be higher by then. The only real question is how you'll pay.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success, to be published in May. Follow him on Twitter: @rickjnewman