Big Changes Ahead for Consumers

Bank of America, THE giant among banks in the United States, announced the institution of a new fee today. According to Andrew Johnson, writer for the Wall Street Journal, Bank of America will begin charging $5 per month to account holders who use a debit card. According to the article, other large financial institutions are expected to follow suit.

For me, this is a sign of major changes to come in the banking industry. It is also a sign of major pressures being placed on banks across the country by federal regulators. Outlining an industry wide $6.6 billion projected loss, Johnson cites new federal limits which have been placed on "swipe" fees associated with debit card usage. Banks are facing a need to be creative in the way they generate their revenues. So who are the victims? You and I as average consumers. We will now have to pay similar fees which, on the surface, may seem minuscule on a monthly basis. The catch is that a simple $5 fee each month means billion dollar gains for large institutions such as Bank of America.

I view this as being a direct outgrowth from onerous regulations which have been placed upon financial institutions. Federal regulations have caused a severe shortage of capital for small business, and a lack of revenues for financial institutions. The question is what lies ahead economically for financial institutions? Also, will life become even more difficult for the average consumer as regulations mount on the shoulders of financial institutions?


Aaron said...

I appreciated your post, mainly because I’ve also wondered why Bank of America charges me small five and six dollar fees for things such as paper statements and first-time direct deposit configuration. You're exactly right that we are the ones who will pay for these new fees now and in the long run. But, my question is who's truly to blame? Is it the greed of large bank corporations or the government that is constantly putting the strangle hold on not only larger businesses but on smaller ones too?

I’ve worked in the home health and hospice industry since 2003. It’s an industry that is heavily regulated by the government due to the fact that nearly 90 percent of our clients are Medicare beneficiaries. Don’t get me wrong when I say it’s a joke sometimes, because I’ve never worked at another job that is quite as gratifying. However, the hoops that the federal government makes you jump through just to open your doors – let alone keep them open in the long run – are enough to make you lose your passion for what you do and give it all up. There may not be too many parallels between banking and in-home health care, but industries that are regulated by the government have a couple things in common. The idea of free-entry is bogus and anyone motivated enough to try and make it in the industry will be met with obstacles from day one until they’ve had enough.

I don’t believe Bank of America is the only one to blame. They’ve got to abide by the rules or they’ll cease to exist – just like so many smaller organizations that don’t have the funding or the time to play the regulation game.

Tawnya said...

From a consumer standpoint this fee is definitely undesirable and petty. However, from a business standpoint, this is a good move. Like sjenn mentioned, it will mean millions of dollars of increased revenue for banks. My question is: how much of that $5 is actually going to profit the bank? They may not be getting as much as we think.

I also agree with Aaron in that the government has put so many road blocks for businesses that it makes it difficult to either enter the market or stay in the market. Are we really still a capitalist nation? Anyway, I understand the motive behind the fee. Businesses can only eat so many costs before passing them on to us as consumers.

Jack said...

I was wondering when the banks might change things up to make some money. Banks are just like any other business. When they are not profitable they need to make adjustments so that they can be. But what are the limits with what the banks can charge and change? Soon all of the banks and credit unions will follow Bank of America and charge fees to have checking or savings accounts with them.
I understand that businesses need to make money but with the increase in bankruptcy's and foreclosures banks are running out of people to lend money to. If banks are not lending money, then they are not making money. So they have to turn on the customers that use them for banking and charge them additional fee's to make up for the loss.
Do the banks have limits on the fee's they can charge? Are their any regulations governing that? Will this change the demand for banks? Will people use substitutes such as credit cards and cash?

Dr. Tufte said...

If I can (emotionally) back off this issue a bit, it's interesting that this move has raised such a ruckus. Because, if you think about it, 5 bucks a month is actually a pretty good deal to get access to your checking account just about anywhere in a safe and efficient manner.

One of the things that economists are not very good at explaining (although we know that they're important) is why people have different comfort zones for pricing behavior by firms. Why is it OK for a gas station to change its prices constantly, but not other businesses? Why is it OK for airlines to charge each passenger a different price, but not other businesses? And why is it not OK for banks to charge us for a really amazing product?

I really like Aaron's statement that "free-entry is bogus". He's absolutely right. But, the two industries he's talking about are ones in which the regulatory system is the primary factor preventing free entry. It almost makes you wonder if the regulators want to prevent the market mechanism from working properly.

Farva said...

I agree with Dr. Tufte. When I read this post my first thought was that I don't make $5 a month in interest from my bank so I would be better off taking my money out and using cash. Then I thought about it for a second and realized how stupid that was. I would much rather pay a $5 dollar a month charge to have the convienences of plastic money and online banking than to carry cash around and have to deal with bills and purchases the "old fashioned" way.

Gubler Family said...

This is just another way for the regulators to punish the financial system for problems that are being delt with. The issue is that our regulators don't see the effects that these regulations have on the consumers of the financial sector. Another example is found in the mortgage industry when new laws imposed a third party ordering system for all residential appraisals. The third parties added on average about $100 per appraisal.

Dr. Tufte said...

-1 on Gubler Family for a spelling error.

Farva: I think the aphorism that's useful here is that many people are willing to cut off their nose to spite their face.

Gubler Family: how are the regulators doing this when it was a unilateral move by Bank of America?