MPR: Banking on Fees, Part 3

Banking on Fees, Part 3:
Fee-for-All
By Bill Catlin
September 12, 1997

First Half RealAudio 2.0 14.4, Second Half RealAudio 2.0 14.4

Consumer groups argue bank fees are gouging customers at a time of record profits in the industry. In Minnesota and nationally, banks have increased service charges and added new ones. The fees add up to a lot of money. According to the Federal Deposit Insurance Corporation, last year Minnesota commercial banks collected more than $800,000 per day in service charges - a total of $293 million. Complaints about the charges have reached the Minnesota Legislature, where proposals to reign in bank fees are pending.

Mason: Look at that!

Jolene Mason is looking over a recent monthly statement from First Bank with a mixture of anger and disbelief at the fees she's been charged.

Mason: Nineteen dollars! That would have filled up my gas tank!

Mason says she never lost a dime to fees until First Bank (soon to be known as US Bancorp) changed its checking accounts last year. The free checking account she opened several years ago started charging her $0.50 for each check if she wrote more than eight in a month. Any visit to a teller triggers the once-a-month maintenance fee. In one five-month span, she paid more than $150 in fees.

Mason: I used to promote this bank like crazy. I did. I mean it was a great bank to me. What do I get for it? Charges! Fees! Miscellaneous deductions! I'm tired of it. It just doesn't make sense to me, why I'm paying these people for my money - my own money.

Mason put up with the situation for a long time, in part because she didn't keep track of how much it was costing her. Her surprise and anger is a symptom of colliding forces in the banking industry - consumer apathy, higher and more complex service charges, and fee disclosures that can be ineffective or incomplete. MPR even found instances of bank representatives giving erroneous information.

First Bank's decision to eliminate free checking last year was one of the most prominent examples of a Minnesota bank instituting new fees. Free checking has been replaced with a variety of accounts, each with a monthly maintenance fee, which customers can avoid if they meet certain conditions. First Bank's Rich Martino says the free checking product wasn't profitable.

Martino: To offer free checking with no strings attached, no requirement for a minimum balance, no monthly fee is - in a very high percentage of cases - gonna be below cost.

First Bank was the first in Minnesota to start charging based on teller visits. But this year, Firstar Bank - the state's fourth largest bank - followed suit. Firstar has lowered some fees, raised others, and introduced one of the most complex fees charged by the state's large banks. Firstar wants customers to dial into the bank's computer for certain services. If customers use a teller or telephone banker instead, they'll have to pay $3 a crack if they do so more than twice a month. Firstar's Cathy Cripe acknowledges the policy is confusing. But she says it will give the bank an opportunity to tell customers they can bank in ways that save Firstar money.

Cripe: Sometimes by instituting a fee, it forces the banker to have that conversation with the customer, and it's an educational process.

But Firstar chooses not to educate consumers about the fee in the glossy brochures used to promote its products. Those brochures omit any mention of the charge, and the fee disclosure brochure gives it only a brief explanation. Firstar officials say the bank is educating its employees to be generous about waiving the charge when customers complain.

Janice Shields, a consumer rights advocate at the Ralph Nader-associated Institute for Business Research, says banks view service charges as an increasingly important source of income, and have a three-pronged strategy to boost their fee revenues.

Shields: 1) Banks are increasing existing fees; 2) [they're] inventing new fees. And we found that in five years, the number of bank fees increased from about 96 to 290, and 3), banks are making it more difficult for consumers to avoid fees.

Browsing a sample of Minnesota bank fee schedules reveals dozens of service charges, some of which appear likely to catch consumers by surprise. TCF and First Bank charge $30 for dormant or abandoned accounts, but their fee schedules don't explain when an account is considered dormant or abandoned. Norwest Bank charges customers $5 to fax even a single page. And many banks even charge customers $3 or $4 if - through no fault of their own - they deposit a check that bounces.

As banks grew more reliant on fees, consultants and the trade press identified several factors that seemed to limit the odds of customer revolt. Consumers are willing to pay a price for convenience. And a large portion of bank customers don't even open their statements, so they don't necessarily know what they're paying.

Consumers also are reluctant to change banks - for one thing, they don't want to throw out unused checks they've paid for. And as Janice Shields points out, changing banks is not a simple proposition.

Shields: It's not like, if you don't like the price on a quart of milk, you can go to another store. I mean it's very easy to go to another store for a quart of milk. Moving a bank account involves changing credit cards, loan payments you might have, if you have direct deposit from work. So there are lots of details that consumers may not want to deal with.

A recent study by the U.S. Public Interest Research Group found small banks are less costly than large banks. The study ranked Minnesota seventh among low-cost states in its survey of 29 states and Washington DC But the group says accounts in Minnesota still cost a lot of money. And there's little dispute banks in general are focusing more on fee income, even in an era of record profits.

Whittle: Banks don't want to gouge the customer, but yet, they're offering all these services and they have to be paid.

Jack Whittle is a prominent banking consultant, and one of many who say a majority of checking accounts are unprofitable.

Whittle: On a checking account or a savings account, per se, they're just getting more expensive than the worth of it.

A study by the Federal Reserve last year found personal checking accounts are a losing proposition unless their average balance is a thousand dollars or more, in some cases more than $2000, and that's for accounts that don't pay interest. Bankers say customers expect 24-hour access to their money through services like automated teller machines and telephone banking and have little appreciation for the value of the service or the cost to provide it.

Audio: Digitized voice "Press next page to display more information."

Here at the Norwest branch on Lake Street in Minneapolis, officials are trying out a new machine called a "touch information center." It's like a push-button teller, offering customers access to information on their entire portfolio of accounts with the bank. It's one example of what the American Bankers Association's Virginia McGuire says is the industry's heavy spending on new technology and services - on top of a growing number of branch offices. McGuire says those investments are one of the reasons banks rely more heavily on fees.

McGuire: It is not inexpensive for a bank to provide banking services. Studies that show it can cost more than $10, $12, $20 per month for a bank, just to maintain your checking account. So it's an enormously expensive proposition when you look at having to provide the brick and mortar networks that the banks provide, as well the increasing consumer demand for electronic services.

Fierce competition is pushing banks to rely more heavily on fee-based income as well. The skyrocketing popularity of mutual funds has forced banks to compete harder for large deposits, and they seem to be losing badly. Their share of household financial assets has declined significantly. At the same time, there's more competition in the lending business from companies like General Motors and AT&T. Consultant Richard Foster says banks have an important need to supplement their income with fees.

Foster: Traditional profits on loans have been shrinking rapidly, and, in addition, banks have to pay competitive rates of interest on their deposits. So banks are being squeezed from both ends, because of market forces.

The irony is when it comes to service charges, banks are turning to a source of income that is more likely to alienate than attract depositors. But the American Bankers Association says banking's increasing reliance on fees reflects fundamental change in the industry.

Traditionally in the banking industry, depositors with large balances subsidized services for those with small balances. But as traditional sources of income are pinched, so are those internal subsidies. Bankers increasingly view charges like teller fees as a way either to cover their costs, or discourage customers from using more expensive services. The heavily criticized teller fee has a bottom-line logic. Teller visits are comparatively expensive, about four times the cost of an ATM transaction. As the industry adapts, Tom Bengtson, publisher of Minneapolis-based Northwestern Financial Review, says banks are designing their checking accounts with a wider array of fee structures.

Bengtson: Some products really steer you more in the electronic area, for example, they want you to use their ATMs, they want you to use their phone banking, they want you to use their Internet banking. Others are more focused on the personal service, they want you to come into the lobby, they want you to come and talk to their teller. They see that as a cross-sell opportunity.

The result is an exploding variety of accounts that demands even more of a consumer in the process of choosing a bank. Minnesota Public Radio's analysis of non-interest checking accounts offered by the state's largest banks found the cost of basic banking functions can vary widely, depending on the account. A First Bank account was the most expensive at $186 a year. A Firstar account was least expensive - virtually free, if the customer is willing and able to do direct payroll deposit or bank via personal computer. The analysis was based on a customer who bounces no checks, and whose checkwriting, teller, and ATM use followed national averages. Reducing the number of checks, teller visits, and so-called foreign ATM transactions lowered the cost of many accounts.

Virginia McGuire of the American Bankers Association says the days of the one-size-fits-all checking account are gone.

McGuire: Now it's a more "pay as you go" system, and, is a more - if you will - "a la carte" system, where you can choose exactly what you want, and pay for exactly what you're using. It's - in many ways - more fair than it used to be, because I'm not paying for what someone else is using, and they're not paying for what I'm using. But that also means that the consumers have to be much more aggressive in making sure that they're in the kind of account that reflects how they're using it. They have done some comparison shopping, and that they are actively managing that banking relationship.

Consultant Jack Whittle makes the point more bluntly.

Whittle: Don't go to the financial institutions and scream and holler that "You're gypping to me [sic]." You might as well walk in with a sign around your neck that says, "I'm dumb and stupid, and I didn't read."

But banks don't necessarily make it easy to find out about all fee-related policies, and - in some cases - don't even publish policies that can be highly costly. The recent US Public Interest Research Group study says many fee brochures are incomplete or confusing, and make it difficult to compare banks. It says rising fees and an increasingly complex array of charges have created a banking system that is burdensome and unfriendly to the consumer. Jack Whittle is one of the strategists who has helped banks sneak new fees past the consumer. For example, he has urged bankers to launch new annual charges on the August or December statements because they typically go un-opened.

Whittle: There's always the old adage they teach you in Marketing 101, if you're gonna communicate to the customer a bad thing, you want as many possible people not reading the bad thing, just living with it.

Whittle now espouses what he calls "up-front communication." But he says customers who are just living with higher fees are better for the bottom line.

Whittle: Most financial institutions, historically, make money on the apathy of the customer: "I don't care, I don't want to do it, I don't balance my checking account, so I'm overdrawn, you charge me some money," I'll pay it, etcetera and so on.

Whittle argues banks can't count on consumer apathy any longer, but - to varying degrees - banks still follow the old marketing 101 adage. They typically list only a small portion of their service charges in their glossy promotional brochures displayed in bank lobbies. To find the bounced check fee or other charges that may be especially high, one usually has to read the less user-friendly disclosure forms. They're often kept out of sight in bank lobbies. When requested, branch employees both at First Bank and Firstar provided the wrong brochure, and at TCF, an employee had to leave the lobby to get one, returning with one that was out of date.

MPR encountered several instances in which bank representatives even gave incorrect information about fees and related policies.

Audio: Cub Foods hubbub

At this TCF Cub Foods branch, the teller quickly found a fee schedule. One of the most detailed items in the brochure is the bounced check fee. The brochure says the fee for each bounced check is $23, regardless of whether TCF pays the check, or returns it unpaid. Asked about the policy, the teller gives incorrect information.

Teller: It's either the $23 if we pay it, or the $6 if we don't. Basically.

Not only is that wrong, it makes the policy seem far more lenient than it actually is. TCF officials say the error was probably a fluke, a mistake by a new employee. Whether it was a fluke for TCF, it was not unique in MPR's research. The most glaring example occurred at First Bank where five calls to telephone bankers resulted in five different answers to the same question. We asked about the maximum number of times the bank charges a bounced check fee if several checks bounce on a given day. The answers ranged from five to "there is no limit." Even though the policy can be highly expensive for customers, neither First Bank nor TCF publishes the limit in their fee brochures.

Connors: I looked through the information we got from the bank when we opened the account in 1991, and there's nothing stated about how often they would charge that.

Shareen Connors found out about TCF's policy the expensive way. TCF will charge customers the $23 bounced check fee up to five times a day. Norwest and Firstar stop at four, and say so in fee schedules. Connors and her husband had to pay TCF's daily maximum - $115 - two days in a row. Connors says she normally keeps close track of the checking account, but they neglected to record two automatic loan payments in their check ledger and left town for a few days, causing a slew of checks to bounce. Connors says she was shocked to return home to a letter notifying them of the first $115 in fees.

Connors: They had to have made a mistake. You know, I was just outraged that they could be charging us this much money. And how could this be happening. And, you know, then when we opened the second envelope, and there was another $115 more, and it was just that much more worse. So, you know, I was pretty shocked I guess that it happened period, and that it was so much money.

Penalty fees from merchants brought the total to $290, and even though the Connors had taken out a mortgage and a loan from TCF, the bank refused to waive a single fee. Shock has given way to anger.

Connors: You know, I look at how much we ended up paying for certain things, and it just, it just kills me, oh, it burns me. And it was $290 just wasted.

TCF Vice Chairman Bob Evans says anyone who criticizes the decision not to publish the bank's limit on bounced check fees is nit-picking. And by comparison with First Bank, he may have a point. First Bank's unpublished policy allows a daily maximum of $252 in bounced check fees, more than double TCF's limit, and triple Norwest's. Though other banks publish their maximum, First Bank officials say the policy has not been a source of customer concern, and they don't want to clutter the fee disclosure brochure with information that's not required by federal regulations.

Bankers argue consumers generally are not concerned about bounced check fees when selecting a bank, because they don't plan to bounce checks. The available research, say bankers, indicates consumers care far more about convenience than fees. But if convenience catches customers, consultant Richard Foster argues, high fees can drive them away.

Foster: One of the reasons that customers leave banks and change banks, are that the banks are charging very high fees, and they don't like them. There are two aspects of that. Customers aren't used to any fees at all. But secondly, the customers do have a point when they say banks are charging very, very high fees. As a matter of fact, this is one of the reasons that customers give when they use credit unions.

Foster says consumers are willing to pay a reasonable charge for useful services. And he says it makes sense for banks to rely more heavily on service charges, given the competition they face. But Foster says consumer anger over excessive fees may fuel a backlash that promotes more of the government regulation bankers gripe about.

Foster: I'm worried that Congress or state legislators - seeing these inequities - will take away from banks the right to price their own services. And the banks should listen carefully. This is a matter of serious concern. Customers do not like it.

Later this year, Minnesota lawmakers are expected to hold hearings on the sort of legislation Foster fears. One proposal would force banks to submit all checking account charges to the state commerce commissioner for approval.

It's not clear the legislation has much of a chance, nor is it clear that banks have lost much business due to anger over fees specifically. But annual polls by American Banker newspaper indicate bank customers are defecting to mutual funds, credit unions and savings and loans. Last year for the first time, fewer than half of those surveyed said a bank is their primary financial institution, down from a solid majority just two years before. Since then, a Washington DC consulting firm reported credit unions, which tend to be less costly than banks, saw record growth in new checking accounts earlier this year.

As banks increase the number and cost of service charges, they create more opportunities to anger customers with unexpected fees. Banks that have found customer apathy to be profitable may be feeling burned by it now. First Bank did NOT try to hide the account changes it made last year. It notified customers well in advance. Jolene Mason acknowledges she probably ignored the notice, but $150 in fees later, that doesn't matter much.

Mason: That's been a fault of mine, not thoroughly looking at my statements. But you look at your statements, and you see, my God, I paid $11 just to write my own checks, to take money out of my own account. It makes you sick, is what it does. It makes me sick. This just confirms to me, that I don't feel like I can trust keeping my money in a bank any more.

Mason's sense of betrayal and resentment may represent a growing backlash against bank fees. Even a telephone banker at one of the state's largest banks couldn't hold back her own opinion that fees are getting excessive, saying, "We don't need any more service fees; we can't even afford to write a check anymore." Banking on Fees

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