The Bank Fee Wake-Up Call

Customers often believe that they wield power with the threat of closing accounts.

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Never before has one bank fee enraged so many customers. Bank of America's new $5 debit card fee is not the first new debit card fee announced by big banks, but it is perhaps the fee with the widest reach and the most attention. The outrage is amplified by the public's dissatisfaction with and anger toward the banks. This attitude was kicked into high gear after a series of bailouts, unceasing executive bonuses, and a lack of serious accountability for the financial industry's role in the recent economic collapse. After a period during which banks received special treatment by the government to help them survive, each new fee targeting customers is like a slap in their collective face.

[See 12 Money Mistakes Almost Everyone Makes.]

These debit card fees are not acts of corporate drones who are out of touch with the needs of the American people, however. The executives who signed off and gave their blessings to these new fees could predict these consequences, understanding how customers would most likely react. A vocal representation of customers would complain loudly, make promises to switch to a better online checking account or credit union, and then, for the most part, do nothing. Inertia is one of the strongest psychological forces in the universe.

Bank executives know that over the last decade, customers have worked hard to automate their finances. If closing a bank account were a matter of simply transferring the balance to a new location, a larger percentage of disgruntled customers would switch. Direct deposit and automated bill payments all require more effort to change, and there's always the risk of having an important payment bounce if you overlook one detail.

[See Considering a Credit Union? 3 Factors to Think About.]

Customers often believe that they wield power with the threat of closing accounts, assuming a corporation would do anything to prevent the loss or market share. The fact is that some customers are better than other customers, and for a company, the quality is tied to profitability. Businesses need to answer to their owners, and that sometimes requires eliminating customers who aren't profitable in order to concentrate on the customers who provide the biggest share of revenue.

It may be a short-sighted approach; today's small customers could become next year's cash cows. Nevertheless, shareholders and Wall Street analysts expect immediate profitability, and that adds pressure for short-term performance. In search of this performance, banks could either cancel under-performing customers, like ING Direct did a few years ago while drawing criticism, or banks could adjust the terms of ownership to be less favorable for consumers, encouraging non-profitable customers to leave voluntarily.

We've grown accustomed to free checking, free ATM access, and free FDIC insurance, but for banks, these services are major expenses. Recently, banks have paid for these services from revenue generated elsewhere.

[See the Best Ways to Avoid Debit Card Fees.]

• Lending money to businesses and individuals at higher rates than the interest paid to depositors for savings accounts.

• Charging higher fees to large businesses and high net-worth individuals to cover costs associated with all customers.

• Expecting small businesses to pay transaction fees every time a debit card is used.

New government regulations have reduced the potential revenue from the third source above. Banks are able to appear in better financial condition to investors if they do not lend, holding onto the cash on their balance sheets. limiting income from the first source. Perhaps the financial institution executives feel the fees that corporate clients and high net-worth individuals pay fees that are high enough. The burden for covering these costs is falling on a wider audience, and more customers understand that the services banks provide have real costs.

If customers migrate to credit unions, online banks, and community banks, the unprofitability will shift from larger institutions, which may have a better chance of handling these customers, to new entities who will then need to deal with providing services to more customers without increased revenue. These smaller banks and credit unions may, in turn, increase fees to afford these customers.

[See Alternatives to Big Banks.]

Additionally, consolidation has been a constant theme in the finance industry's changing landscape. Larger banks will continue to purchase smaller banks. Customers who moved to these smaller banks will find that their accounts are once again engulfed by an institution too big to fail. After a transition period, customers who thought they were safe from big banks' policies will be migrated to the more expensive accounts operated by the larger institutions.

Even including lone individuals motivated enough to leave their bank, a few organized groups that have removed millions of dollars from large banks, and an initiative gaining momentum scheduled for November 5 called Bank Transfer Day, consumer actions have not attracted the attention of major bank executives. They are not reconsidering their approach, and they won't unless a significant representation of shareholders speak out.

The endeavor to change the industry for the benefit of the consumer is not a worthless approach, but citizens have some responsibility while encouraging this change. The price of everything generally increases over time, and what is free today may not be free tomorrow. Move your bank accounts if you like, but prepare yourself for higher prices in the future by managing your expenses well and by finding new ways to earn more income.

Take care of yourself so when your bank introduces a new fee, your grocery store increases the price of a gallon of milk, your landlord raises your rent, or your insurance rates go up, these increases don't affect your quality of life or your ability to plan for the future.

Luke Landes is the founder and author of Consumerism Commentary. On Consumerism Commentary, Luke discusses the money management issues that face readers on the path to improving their own finances, with a perspective that focuses on active decision-making, consumer education, and self-reflection. See his recent reviews of the best credit cards.