Banks' Fees Rise Along With Consumers' Ire

Chris Hoofnagle, Director of EPIC West, has an interesting post that details press reports over the last few years that document the rise of bank credit card, debit card, ATM and other fees, particularly those related to late payments, overdrafts, bounced checks and other "penalties." I think it's been well documented that such penalties as overdraft fees have caused the bank regulators concern that they are being properly assessed by banks and that banks properly disclose them to consumers.

EPIC West is the West Coast branch of the Electronic Privacy Information Center, a pro-privacy advocacy organization, and Chris approaches the problem as a failure of the banks to realize the alleged benefits of looser privacy information sharing permitted by the Gramm-Leach-Bliley Act. I think that's a fair comment, but would argue in return that G-L-B imposed upon banks regulatory requirements with respect to information privacy and security that have substantially increased the cost of doing business for financial institutions, and that those costs are, as always, passed along to customers, banks not being "not-for-profit" businesses. G-L-B also brought to consumers those wonderful annual "privacy notices" that few consumers read and those that do suffer from that eye-glazing numbness caused whenever lawyers draft anything. In addition, the alleged savings to banks from G-L-B were to come not only from information sharing (although that was admittedly a "selling point"), but by the ability of banks to expand and "rationalize" their services across many business lines. That promise, too, has yet to be fully realized. I don't think that you can call out banks on the issue of higher fees principally on the basis that information sharing, alone, has not lowered bank fees.

There is contrary evidence that indicates that the growth of late payment fees on credit cards has slowed dramatically over recent years. Over the past five years, late payment fees have risen 20%, compared to a 104% rise in the previous five years. Nevertheless, the same data source notes that late payment fees in 1994 averaged $12.55 and in 2004 averaged $32.61 (with the highest being $39.00), so the level of these fees is not inconsequential.

The law school professors at PrawfsBlawg jump all over banks for these fees (and ATM fees, which also annoy me) principally because they believe they are "excessive" (always a tricky accusation because it's then a personal judgment call as to what's "just right"), and that they disproportionately affect the poor, the group least able to afford them. One commenter even hints at an argument that such fees might violate the Americans With Disabilities Act because disabled people "are overwhelmingly poor" (I'll defer to her supporting data, since I have none to support or challenge that assertion), which is, in my opinion, stretching it a bit; however, it's the kind of "trash talking" that can makes bankers shudder.

As my profile indicates, I represent banks. Having said that, I, too, admit that the increased charging of these fees by banks also concerns me. I agree that overdraft, late payment and bounced check fees disproportionately affect poorer Americans, simply because they tend to be the type of people who most often cannot pay their bills on time or who write overdrafts on their checking accounts. The critical issue to me, however, is that consumers be adequately informed about these fees before they use the services. Knowledgeable consumers should have the right to incur these fees in return for the use of the services provided by the bank (for example, covering the amount of a check for which the consumer's account does not contain the necessary funds). In a free market economy, the point is not to be defrauded. If you know what the rules of the service are before you agree to use the service,  you shouldn't be able to complain that those rules are being enforced. If your argument is that the poor are too stupid to make informed decisions, that disclosure is irrelevant, and that these fees need to be severely curtailed or prohibited as a matter of "fairness," then I'd have to reject that argument. But, then, I'm a running dog lackey of capitalist blood-suckers, so you'd expect that from me.

The underlying economic problem for the banks is the flat yield curve. It's frankly without precedent (outside of a recession), or at least that's what my bank and hedge fund clients tell me. I defer to them on such matters, because I'm merely their mouthpiece with no mind of my own. However, assuming that this is true, banks can't make nearly enough money making conventional loans for the simple reason that the spread between what they pay to borrow the money (for example, by issuing a certificate of deposit to a consumer) and what interest rate they can charge on a loan they make with the funds borrowed, isn't enough to cover operating expenses, much less make a profit. That's the problem when the spread between two- and ten-year bonds is 20 basis points (0.02%), and the spread between two- and thirty year bonds is 40 basis points (0.04%). Thus, there has  been increasing pressure on banks to increase fee income, from whatever sources are legal.  The fees charged are legal. The banks are trying to make money. It's what they do.

Of course, haters of banks will be pleased to know that they eat their own. I recently received a bill from my bank for an annual $20 fee to renew a business line of credit. The fee was charged to my line of credit, and the terms of the line provide that interest accrues from the date of the advance. Thus, the bill also included an interest charge of $0.06. I paid that amount the date I received the bill. The next month, I received a bill for $0.03, which represented interest on the $20.06 amount that had accrued between the date the amount was advanced until the date payment was received. Even at bulk mailing postage rates, it had to cost the bank more to process and mail that bill than the $0.03 they charged to me. I drove to a local branch of the bank, handed a teller three pennies, and demanded a receipt. She was as mystified as I as to why the bill was sent, but complied with my request. The next month, I received a statement showing that no balance was due on my account. How much did that bill cost to generate and mail? Classic!

So, whether you represent them or oppose them, banks don't try to single out the poor to screw. In terms of squeezing income out of customers, they are are equal opportunity hosers.

UPDATE: For further discussion of the negative effect of the flat yield curve on banks' earnings, read here, and for the importance of fee income, read here.

UPDATE II: My apologies to EPIC West and PrawfsBlawg for the multiple tracbacks. Ineptness married to haste is always deadly.

Comments

[LL]

Ooooo, see, when you start talking economics and including graphs, wow, you just rock my world Kev. Good post.

[Kevin]

LL, whatever it takes to get under a reader's skin, I'm all for it. I'm happy that a flat yield curve graph starts your engine. I'll throw them in more often. What do pie charts do for you?

[LL]

Pie charts--boring.

Now, if you know me, you would know that the standard Supply/Demand graph is what makes a Libertarian Economist the happiest!!