Commentary: Why Rising Bank Fees Are Backfiring

When New York schoolteacher Miriam Faugno was told by her bank 13 years ago that she couldn't see a teller unless she kept at least $5,000 in her account, she took her business to the bank down the street. But now, that bank's high minimum balances and charges for using automated teller machines have her searching again for a better alternative. "I have the feeling that, in small increments, banks are just sucking us dry," Faugno says.

Faugno is one of a growing number of consumers unhappy with the steadily rising cost of using banks, especially their bewildering plethora of fees on top of low interest rates on savings. And these days, she has plenty of other choices for her banking needs, which include checking and savings accounts, individual retirement accounts, brokerage services, credit cards, and loans. Over the past two decades, numerous mutual funds, brokerages, credit-card issuers, credit unions, and even check cashers have been stealing away customers from banks. These competitors offer comparable products and services at often lower costs. And many pay higher interest rates on customers' balances.

The erosion of banks' market share has been dramatic. From 1975 to 1995, the portion of U.S. household financial assets held in bank deposits fell from 25.8% to 13.7%, according to estimates based on data from the Federal Reserve Board. But that hasn't stopped banks, who are finding it increasingly difficult to make money through traditional lending, from creating new fees and hiking old ones.

LOST LOGIC. Banks say fees not only boost revenues but deter use of expensive products, charge more accurately for services, and chase away unprofitable customers so the banks can focus on selling more to good customers. Unfortunately, most banks aren't very good at executing this strategy. For example, while they are trying to discourage use of expensive tellers and checks, many banks charge extra for electronic services like computer banking.

Even if some fees make sense, on balance they are almost certainly alienating too many profitable customers. "For years, U.S. banks have gouged consumers with ever-increasing fees.... They are going to scare more customers away," says Edmund M. Mierzwinski, a consumer advocate with U.S. Public Interest Research Group. Instead, banks should be wooing people with better service and products. "The point is not to charge customers more but to get more of their business," says David S. Berry, director of research at investment bank Keefe, Bruyette & Woods Inc.

That logic, though, seems lost on most banks. In 1990, the newsletter Fee Income Report counted 96 different bank fees. In 1995, it found 290--for everything from unreturned ATM cards on closed accounts to excessive safe-deposit box visits. Most controversially, some banks have started charging noncustomers who use their ATMs a surcharge that usually runs 50 cents to $1.50 per transaction, but can soar as high as $10 in casinos and remote locations, according to Bank Rate Monitor.

Banks keep jacking up fees, too. In 1990, they charged an average of $12.54 for a bounced check and $10.71 to stop payment on a check. By 1995, this had risen to $16.73 and $14.41, respectively, says William Hampel, chief economist at Credit Union National Assn. Now some banks are even charging a lucrative $30 per bounced check.

OPTIONS. Banks also are losing business thanks to the niggardly interest rates they pay on minimum balances required to open accounts. Chase Manhattan, the nation's largest bank, pays up to 2.85% on accounts with $5,000 in checking and savings. In contrast, Merrill Lynch & Co. pays 4.75% on $5,000 accounts, and Fidelity Investments pays 4.49% on accounts with $10,000.

Less affluent consumers have other options, too--thrifts, smaller banks, and especially credit unions, which have lower regulatory costs and pay no income taxes. Fees and minimum balances tend to be lower at all three. Credit unions require an average of $150 to open a checking account that pays 2.15% interest or a savings account that pays 3.30%.

To be sure, not all banks are rabid imposers of fees, and many are glad to waive charges for their good customers. Some banks have begun omitting fees to attract more business. And a few are skillful at implementing fees to meet strategic goals. But most banks are just driving away people like Faugno. "They don't need to nickel-and-dime me to death," she says. "They might get less in fees, but they'd have a happy and loyal customer... and if I trusted them, I might buy other things." Hello, banks, are you listening?