Bankers, Hear My Plea: Stop the Fee Insanity

There was a time when bankers engaged in banking. Can you remember those days, when ALCO committees would meet and discuss how to allocate the capital generated from deposits?

Of course you don’t, because banks today are hopped up on a drug called fees — and there is every sign that banks will increasingly rely on fees for revenue, rather than traditional treasury returns.

I urge banks not to go down this road. When I start hearing about $5 ATM fees, I worry. The perception of banks as blood-sucking vipers will only get worse — and yet banks continue to march down the fee-speckled path.

The obvious comparison is to the airplane industry, which has become synonymous with fees. Last year, for example, Delta generated $500 million of fees, tops among all US airlines. But the negativity associated with such fees comes with a cost. And to Southwest’s benefit.

Alas, business is business and airlines have to cover their nut. Can the same be said for banks. The fundamental difference between the airline industry and banking is that banks can make money through means other than selling space on their airplanes. Banks can generate interest income and investment income. (The mechanics of banking are all coming back to you now, right?) Last year US banks generated $536.9 billion of interest income, according to FDIC data, and while that is down from heights of the boom years, it is still a hefty amount of revenue. Non-interest income, which includes fees, climbed to $236.8 billion last year from $207.7 billion in 2008. Is not $236.8 billion more than enough?

There are repercussions to the fee strategy, but I am not sure bankers understand them. From MSNBC.com:

Earlier this month, Bankrate.com released a survey showing 75 percent of consumers earning $75,000 or more would rather switch banks than pay higher fees. Overall, 64 percent of customers said they’d bolt.

That ire may not translate into action, however, and banks know it. A J.D. Power study released on March 1 found that, while consumers are switching banks at a slightly higher rate than in the past (8.7 percent last year, compared to 7.7 percent a year earlier), fees and interest rates have almost nothing to do with their choices. “Pricing” impacted only 4 percent of consumers, the study found.

This would not be a surprise to behavioral economists. Consumers almost never consider fees — particularly punitive fees like overdrafts or “your balance fell below $1,000” charges — when making purchase decisions. Nearly everyone suffers from what’s sometimes called “magical thinking” — as in, “I’ll never misbehave and get hit by that fee.”

So what do people consider when switching banks? Big, impressive buildings and billboards seemed to matter most, the survey found. Here’s the depressing quote from the JD Power press release:

“For customers evaluating and ultimately selecting a new bank, the most important factors driving their decision are advertising; branch convenience; products and services; promotional offers; and direct and indirect customer experience,” it said.

But at what point does “Am I satisfied with ‘products and services’?” become “I am dissatisfied with ‘products and services’ as a result of the fees I am paying”? I suggest that such a transition is easier than banks think. Of course, switching to a new bank is a royal pain in the you-know-where, but that impediment will only remain for so long. There are literally teams of people trying to create new banks that don’t throw up such a roadblock. And then what? What of the banks that kept on upping their dosage of non-interest income? What happens when non-interest income ramps up to $350 billion only to come crashing down to $150 billion? That will be the day when those bankers who practice banking will wag a finger and say, “I told you so.” Assuming there are any such bankers left by then.