Banks are undergoing the biggest changes in decades, and the majority of their customers will feel the impact. Many of the reforms are coming from Washington, through new regulations meant to level the playing field for consumers and address some of the problems that led to the 2008 financial crisis. The 2009 CARD Act toughened the rules under which credit-card issuers can raise interest rates and charge a variety of fees. The Dodd-Frank financial reform law passed in 2010 included rules likely to make banking less risky but also less profitable. Another issue under debate in Washington could change the way banks, retailers, and consumers use debit cards. And banks have implemented some reforms of their own, to cope with bad loans, a punishing economy, and the changing needs of consumers.
Most of the regulatory reforms are meant to make financial products easier to understand and more equitable. But they're also raising costs to banks, forcing them to find new sources of revenue—which means more fees and fewer services for customers. Here are a dozen of the biggest changes, with strategies for how consumers can minimize fees and get the best perks:
Less "free" checking. It's not going away, but fewer people will qualify for free checking as banks look for ways to earn more revenue from low-balance customers. In a 2010 survey, for instance, Bankrate.com found that the number of checking accounts with no monthly fee and no balance requirements fell sharply, from 76 percent in 2009 to 65 percent a year later. The portion is probably even lower now.
Strategy: Most banks still waive monthly fees if you keep your balance above a certain minimum or park other assets with the bank. Ask how to qualify, and remember to watch for fees on your monthly statement, in case the terms change. A few banks, like Pittsburgh-based PNC, are retaining free checking for everybody but taking away other perks, like reward programs for debit cards.
[See why low inflation seems high.]
More annoyance fees. Banks are still allowed to charge fees for a mind-boggling number of things, such as: using another bank's ATM (often called a "foreign" transaction fee, although it has nothing to do with overseas banks), an excessive number of transactions, writing too many checks, using the teller window too often, talking to a live customer-service agent on the phone, transferring money, and wiping your feet on the mat in the lobby. (I'm kidding about that last one, but maybe I shouldn't give the banks any ideas.)
Strategy: Consumer advocate Ed Mierzwinski of the U.S. Public Interest Research Group advises asking your bank for its full "fee schedule," which is more detailed than the glossy brochures usually sitting on the counter. If the bank demurs, remind them they're required to provide a fee schedule upon request. Once you know the fees, avoid those you can and minimize the rest.
Sneaky low-balance fees. Banks have surprising leeway in how they handle your deposits and payments, and some of them manipulate funds to push down your balance—so they can charge a fee for going below minimums, or even for bouncing checks.
Strategy: Watch out for automated, recurring payments deducted from your account earlier than they used to be, plus another trick that allows banks to deduct bigger payments before smaller ones, regardless of chronological order. Complain if you notice these tactics and ask if you can stipulate your own payment dates. If not, a third-party bill-pay service like Paytrust or Quicken will give you more control over your own payment schedule, for a monthly fee of $10 to $15 or so.
New fees on mortgages. Regulators in Washington are finally starting to grapple with how to fix flaws in the mortgage system that contributed to the housing boom and bust. A final solution could take years, but in the meantime, fees are likely to rise for borrowers with a down payment of less than 20 percent and for some first-time buyers who qualify for an FHA loan. That's in addition to any extra costs that might come from rising interest rates.
Strategy: You'll get the best rate and terms if you have a down payment of at least 20 percent. To help get there, consider buying a smaller home than you might have planned for, or making other compromises. The savings might help finance an addition or other home improvement down the road.
More come-ons for new customers. The iPod is the new toaster, with some banks giving away trendy gizmos to customers who open a new account and meet certain rules. Other banks are offering gift cards, higher interest rates, or cash back. The recurring theme: Banks want as much of your business as they can get, so to qualify for giveaways, customers typically need to meet balance requirements, have multiple accounts, or do a minimal amount of business with the bank.
Strategy: Don't chase offers. It can be laborious to change checking accounts—which banks know—so switch banks or open a new account only if you think you'll stick with the new bank.
Limits on debit-card usage. New rules being worked out in Washington will reduce the "interchange" or "swipe" fees that banks and credit-card issuers charge merchants every time a customer buys something with a debit card. The changes, which must be finalized by April and will go into effect in July, would lower costs for retailers and possibly lead to slightly lower prices for some products. But a few banks have argued that because of lost revenue, they might have to put limits of, say, $100 on debit-card purchases.
Strategy: Since these new rules aren't yet finalized, it's hard to know if banks are bluffing. But new limits on debit-card purchases would leave three main choices for consumers: Use a credit card, use cash, or simply skip the purchase. Credit cards, of course, come with steep interest rates that effectively raise the cost of the purchase if you carry a balance. So the best alternative is to use cash, which has an added benefit: Consumers tend to spend less when they're forced to fork over paper currency.
Higher credit card rates. The CARD Act prevents issuers from raising credit-card interest rates during the first 12 months of a new account, so some lenders have simply raised the starting rate on cards. Surveys by LowCards.com show that average rates in mid-2009, when the CARD Act became law, were about 11.6 percent. Since then, most interest rates have fallen—but credit card rates have crept up to about 14 percent.
Strategy: Rising rates are yet another reason to live within your means and reduce or eliminate debt. If you must carry a credit card balance, use a card with the lowest rate you can get and look for a rate that's locked in for a set period of time. And remember that issuers can still raise rates, as long as that's properly disclosed.
More credit card offers. Some consumers looking over their mail might justifiably wonder, what credit crunch? Banks mailed out three times as many credit card solicitations at the end of 2010 as they did a year earlier, according to Bill Hardekopf of LowCards.com, a sign of growing confidence in the economy—and desperation to find lucrative new customers. But most are targeting consumers with good-to-excellent credit, which means those people may be fielding a deluge of offers while others go neglected.
Strategy: If you're thinking of transferring a balance, check first with your current issuer to see if they'll match or beat the offer. If you switch, watch out for transfer fees. And remember that having too many credit cards can harm your credit rating.
Risky new types of cards. Prepaid debit cards from issuers like Green Dot, Rush Card, and BuyRight (often emblazoned with a Visa or Mastercard logo) have gained popularity with people who have poor credit or want to avoid using a bank. But they often entail high fees, with fewer protections than banks offer. In a recent study, Consumers' Union found that the majority of such cards charge a monthly fee and levy additional charges for activating the card, withdrawing cash from an ATM, getting a paper statement, and other things. Prepaid cards can easily cost $20 to $40 per month—just to use your own money. Controversy over such fees is one reason the ill-fated "Kardashian Kard" kratered (sorry) shortly after its debut in 2010. Plus, prepaid cards usually don't help build your credit rating, and your money may not be insured by the FDIC.
Strategy: Be suspicious and make sure you're aware of all fees before signing on for a prepaid debit card. For many people, a secured credit card—collateralized by your own money, in a bank account—may be a better option. Or find a co-signer who will bear the risk if you default.
Costly overdraft options. New rules prevent banks from automatically charging customers for debit card overdrafts, which can happen even if you make a small purchase and don't have enough money in the account to cover it. Before the change, banks could allow you to make an overdraft purchase—but charge you $40 or more for the "protection." Now, you have to "opt in" to enjoy such a privilege. Banks are still allowed to charge you for bouncing a check.
Strategy: Banks make overdraft protection sound like a good deal, but usually it's not. Some banks have reasonable fees and policies, but many others basically charge you a whopping fee for spending money you don't have. Without protection, a friendly bank might still cover an overdraft, with no fee, assuming you promptly deposit money in the account. What's more likely is that your debit card will simply get turned down. That might be embarrassing, but it's better than paying a $40 fee to buy a $5 sandwich. "Nobody should opt in," says Mierzwinski. "Consumers need an artificial buffer in their brain that prevents them from overspending."
More deals for high-balance customers. No surprise, but if you've already got a lot of money, you're likely to get the best deals. Customers who keep $10,000 or more in their accounts can sometimes qualify for gift cards, higher interest rates, fee waivers, and other perks. The same goes for credit cards, with big spenders often enjoying perks like a waiver of exchange fees for overseas purchases.
Strategy: Banks often count the combined assets for all your accounts, so it pays to consolidate checking and savings accounts, CDs, credit cards, and other activity at one bank. Make sure you ask, since offers are often targeted at new customers, even if existing account-holders qualify as well.
[See why the rich need the poor.]
Fewer small banks. Some consumers like small community banks where they know the bankers and feel they're less captive to a soulless global corporation. But the George Baileys of the world are becoming scarce. As banking becomes less profitable and the costs of complying with new regulations go up, small banks may find it hard to compete. "We suspect that the mega banks will further cement their dominance of consumer banking and smaller players will continue to be forced out," predicts analyst Jaret Sieberg of brokerage firm MF Global. Policymakers in Washington may even want that: Consolidation of the banking industry could slash the number of smaller banks but also produce three or four more megabanks, providing increased competition for giants like Citibank, Bank of America, and JPMorgan Chase.
Strategy: Banking can be a ruthless business, so if you expect it to be chummy, recall Harry Truman's old advice: If you want a friend, get a dog.