Fees Creep In as Costs Increase for Banking Industry

Bank of America’s decision to start charging certain customers each time they withdraw money from one of its automated teller machines reflects a trend that is sweeping the banking industry, leaving consumers facing rising fees for services that once were free.

Banks used to be so eager for customer business that they gave services away. Checking accounts were free, and so were the checks. Safe-deposit boxes cost nothing, and neither did money orders or cashier’s checks.

And the idea of charging customers to use an automated teller machine was out of the question. After all, customers were encouraged to use ATMs because the machines would replace tellers and allow banks to cut costs.

Those days have vanished, however, and bank customers now face a fee for almost any type of transaction. And those fees are going up, doubling and tripling the cost of banking for consumers who cannot afford to maintain the minimum deposit levels required to avoid or reduce the fees.

Few Services Free

For instance, the average monthly maintenance fee for a checking account in 1984 was $2.70, and 7.4% of the nation’s banks charged no fee at all, according to a survey by Sheshunoff Information Services, an Austin, Tex., financial consulting firm.

By 1988, the average monthly fee had nearly doubled to $5.21, and the percentage of banks providing free checking had dropped to 2.3%.

Even the cost of bouncing a check has gone up sharply: Sheshunoff found that the average bank charge in 1988 is $11.81, compared to $7.34 in 1981. Similar increases have affected most other banking services, and few services appear to be free. Although only 16% of the nation’s banks charge customers for using bank-owned ATMs, more are expected to follow B of A and the other three major California banks.

“As more and more institutions begin to understand what their costs are, a lot of things that people are getting for free in those institutions are going to start to cost,” said Jack Kopec, an executive vice president at Wells Fargo in San Francisco and chairman of the Washington-based Consumer Bankers Assn.

Of course, customers can eliminate or sharply reduce most banking fees by maintaining a minimum amount of money on deposit at the institution.

But the interest rates that banks pay for those deposits are much lower than a customer could receive elsewhere, say in a short-term certificate of deposit. So customers face a choice of higher monthly bank fees or reduced investment earnings.

Some customers, however, cannot afford the minimum balance and must put up with the rising fees or go without a basic bank account.

A study by the General Accounting Office, an investigative arm of Congress, released earlier this month said 17% of the nation’s families do not have bank accounts and more than half of those families have annual incomes of less than $10,000 a year.

Justify Fees

“What’s happened in recent years is that actual fees for checking accounts have gone up, incidental fees have gone up and the minimum balance to open an account has gone up,” said Ken McEldowney, executive director of San Francisco-based Consumer Action, an advocacy group that has tracked bank fees in California and nationwide for several years. “When you combine all those factors, it can result in hefty, hefty increases. I have never seen any justification for it.”

Actually, banks do offer a justification for the rising fees based on the industry’s changing economics.

Before 1980, banks’ earnings depended heavily on the difference between the interest they paid to depositors and the higher interest rate they charged to borrowers. Savings account interest was kept artificially low by government regulation, and no interest was paid on checking account balances.

The result was that savers provided the banks with a low-cost source of funds and subsidized bank operations. Institutions were pretty much guaranteed a decent level of profits.

But the subsidy and the guarantee began to disappear when interest rates were deregulated in 1980. Banks suddenly had to pay higher rates to attract savings accounts and compete with new products, such as certificates of deposit and money market accounts. They even had to start paying interest on checking accounts.

As the margin between what they paid for money and what they were able to charge borrowers narrowed and profits dropped, banks faced the prospect of charging for services that had been free.

Making Checking Pay

“It is almost like we left the Stone Age and said, ‘Gee, we have to think of these services in terms of profit centers and you have to run it more like most businesses are always run,’ ” Wells Fargo’s Kopec said.

That has meant making checking accounts pay for themselves, either through increased fees for the service or by requiring the customer to maintain a minimum deposit that the bank can then loan out at a higher rate to earn income.

Two other changes increased the pressure to raise fees to consumers, according to Stephen K. Ledford, research director at the Bank Administration Institute, an industry research organization in Rolling Meadows, Ill.

Large corporations, traditionally the biggest customers of banks, began to raise their money by issuing debt on the public market. So the banks lost income from these loans. At the same time, bank operating costs were rising.

“With these downward pressures on profits, the only place for banks to make up the lost earnings would be in fee income from consumers,” Ledford said. “It is just simple business economics.”

This translated into increased fees for consumers, a trend that few bankers see any chance of reversing.

“You are probably going to see a continuation of what has been going on,” Kopec said, adding that many of the smaller banks that have avoided charging for some of the services so far will probably join the bandwagon fairly soon.

THE GROWING COST OF CONSUMER BANKING IN CALIFORNIA

Average fee/cost Service 1984 1988 % change Issuing money order $1.15 $1.47 +27.8% Personal checking $2.70 $5.21 +92.5% (monthly maintenance fee) Minimum checking balance $843 $493 -41.6% to avoid service charge Credit card (annually) $15.68 $15.88 +1.2% Safe deposit box (annually) $12.16 $13.63 +12.3%

Source: Sheshunoff Information Services Inc.

Table compares interest-bearing checking accounts at the largest financial institutions in California for 1985 and 1988, showing how fees have risen while the annual percentage rate has declined. The average minimum balance is the amount necessary to avoid the monthly fees.

1985

Average Monthly Annual Institution min. balance service fees % rate Bank of America $2,500 $4 plus 30/check 5.25 First Interstate $2,000 $6 5.25 Security Pacific $1,500 $5 plus 30/check 5.25 Wells Fargo $2,000 $6 5.25 American S&L; $500 $4 5.25 Cal Fed $600 $6 5.25 Glendale $500 $5 5.25 Great Western $750 $4 plus 15/check 5.25 Home Savings $750 $5 5.25

1988

Average Monthly Annual Institution min. balance service fees % rate Bank of America $2,500 $8 4.00 First Interstate $2,000 $8 4.00 Security Pacific $1,500 $5 plus 40/check 4.00 Wells Fargo $1,500 $5 plus 30/check 4.00 American S&L; $500 $5 5.25 Cal Fed $800 $6 5.00 Glendale Fed $1,000 $8 4.75 Great Western $1,000 $6 4.75 Home Savings $750 $6 4.75

Source: Consumer Action