Bank fees debated on public radio

Northwestern Financial Review, Oct 11, 1997 by Bengtson, Tom

On Sept. 12, I had the opportunity to participate in a discussion about bank fees on Minnesota Public Radio's Midday program. Hosted by Gary Eichten, the discussion included myself and Jordan Ash, the loan counseling director for the Minnesota chapter of Association of Community Organizations for Reform Now.

The discussion followed the broadcast of the concluding installment of a threepart series MPR was doing on bank fees. The first 20-minute installment, aired Sept. 10, was about fees related to overdrawn checking accounts. The second installment, aired the next day, was about ATM fees. The concluding installment was about the banking industry's growing reliance on fees as a source of income. Reporter Bill Catlin did the work on the series.

In our live, 40-minute discussion, a number of issues came up. Regarding checking accounts, the question was raised about whether the idea of the bank charging a "penalty" for overdrawing the account is a good idea since studies have shown that such fees do not result in a decrease in the number of bad checks people write. The second question raised concerns about the amount of the fees. Consumers quoted in the series felt that a charge of about $20 on an overdraft was simply too high, considering the cost of processing that check is only about $2.

On the first question, I noted that banks are not the only ones to charge a "penalty" fee in an effort to prevent people from doing certain things. I noted that, for example, airlines frequently charge a $50 fee for changing a reservation, and that my city water bill includes a penalty if I pay it after a certain date. My point was that a discussion about penalty fees is valid, but only if it applies to all industries; there is no reason to single out the banking industry on this question.

With respect to the fee being too high, I noted that it really isn't accurate to compare the fee solely to the cost of processing a check. I explained that when consumers overdraw their account, they are seeking an on-demand, unsecured loan. Bankers become successful by appropriately pricing for risk. Lending unsecured money when the terms have not been previously established, and the bank has not been given the opportunity to conduct a credit check, is risky and banks have the right to price for that.

I said, however, that even if you want to assume it only costs the bank $2 to cover that overdraft, a $20 fee is not necessarily too much. Many other common products are marked up 10 times or more, I noted. A glass of soda pop that costs about three or four cents to make, commonly sells for 85 cents. A cup of coffee that maybe costs a quarter to make, can cost up to $2.75 at a fancy coffee shop. So if you want to have a discussion about what is an appropriate level of mark up, that's fine. But again, I don't see how you can confine the discussion to the banking industry.

Ash quickly responded that he wishes banks would treat overdrawn checking accounts as a short-term loan. He cited an example where someone bounced a 98-cent check and was charged $21 by the bank to cover it. He noted that is an interest rate in the thousands of percent.

I didn't get the opportunity to say so on the air, but Ash's comment is off. First of all, the 98-cent check example makes for nice rhetoric, but the typical bounced check, of course, is for much more than that.

But more importantly, it isn't fair to apply the same terms to a loan that is negotiated in advance with a loan that is granted after the fact with no prior opportunity for the bank to consider the credit. An overdrawn account is an on-demand loan where borrowers take money without providing any information about themselves their intent to repay, or their ability to repay. This kind of loan cannot realistically be compared to a typical loan.

A few listeners called during the discussion. One said she was upset because the bank had changed its practice on ATM withdrawals. She said that previously when she requested more money than her account held, the ATM would notify her that her account didn't have enough money and the transaction was denied. Now, she says, the ATM conducts that transaction and she later is charged a fee to cover the loan. She didn't believe the bank had notified her of the change and she was upset.

A point that I tried to make is that there are dozens of banks in the Twin Cities area, not to mention many other financial services providers. Consumers have more choices today than ever. There is no excuse for being unhappy with your bank. It is too easy to take your business elsewhere.

Ash tried to make the argument that it is not easy to change banks. He said it is a complicated process and, that for all practical purposes, most consumers are stuck with their current bank.

Eichten noted that oftentimes banks waive fees if the customer complains about them. He asked whether this is true and whether it is fair. I answered that, as in any business, a customer is going to get better service if he or she visits the person with whom he or she is doing business. Communication is important between the banker and the customer, as it is between any service provider and customer. I encouraged listeners to establish that relationship.