The New York Times
By: Nancy Folbre
October 22, 2012
Financial regulation is a never-ending saga. Restrict banks' opportunities to turn a profit in one area, and, not surprisingly, they redouble their efforts in another. New credit card rules that went into effect in 2010, as well as legal tussles over "swipe fees," have created pressure to find other sources of revenue.
Fees for late payments and overdrafts are making a big contribution to bank balance sheets these days, partly because consumers don't pay as much attention to fees as to interest rates.
Efforts to regulate such fees may prove less effective in the long run than a consumer-driven shift toward nonprofit banks. Credit unions typically charge much lower fees than banks and offer more attractive interest rates. In rankings of customer satisfaction, they beat for-profit banks hands down.
Last year Bloomberg News published an article, "Bank Fees Are a Credit Union's Best Friend," and the trend continues. As one reporter for Forbes put it, "The fee environment worsened for bank customers in virtually every way possible in the first half of 2012."
Consumers aren't oblivious to all fees. Last year, loud protests led Bank of America to scrap its plans to charge for the use of debit cards. But fees based on late payments and overdrafts are less salient, even to highly educated, well-informed customers, for three reasons:
First, the variety of fees paid under different circumstances makes it hard to comparison shop. Try asking your bank for a complete schedule of all the fees it charges. Even if you can get the information, it's not easy to understand. Many banks now aggressively court low-income borrowers who are more likely to make late payments and less likely to ask inconvenient questions.
Second, banks can manipulate the timing of payments to maximize penalty charges. Several banks, including US Bank, Bank of America and JPMorgan Chase, have paid millions to settle accusations that they improperly manipulated debit card transactions to generate higher overdraft revenue.
Third, people don't like to believe they will make a late payment. If they do, they tend to feel just guilty enough to accept the punishment inflicted. It's hard for customers to know how many others are in the same boat. Yet the boat holds a lot of passengers. A 2007 study by the Federal Deposit Insurance Corporation estimated that about 25 percent of Americans paid at least one overdraft fee that year.
Late mortgage payments are also common. When the financial crisis hit, many families found themselves unable to pay but received relatively little effective assistance renegotiating their loans.
Both Wells Fargo and JPMorgan Chase are facing class-action lawsuits accusing them of charging excessive and abusive fees to people delinquent on mortgage payments.
Late fees are designed to discourage bad behavior and are influenced by estimates of risk. But a study of credit card penalties published last year in the Journal of Financial Stability, "The Cost of Being Late," shows that banks with bigger market shares tend to charge higher fees.
It can be more time-consuming to switch banks than it used to be, because many consumers now rely on direct deposit and online payment systems that can be cumbersome to modify.
Improved regulation could help consumers, even though banks seem to be able to burrow their way around new rules, poking their heads up in different places. The new Consumer Financial Protection Bureau may develop strategies in this game of whack-a-mole.
But why bank with moles in the first place? Credit unions charge fees, too, but they don't design them to maximize revenue, because their goal is to serve their member-owners, not to turn a profit. That's why their fees are lower and their loans more open to renegotiation.
Credit unions are painfully small compared with multistate megabanks, representing only about 6 percent of all financial institution assets in 2011. But they are growing fast on the basis of their reputation for excellent customer service.
Your fees, your fault -- especially if you pay them to banks instead of to a local credit union.