September 22, 2023

Op-Ed Columnist: Revenge of the Gougers

Then there’s the “are we really supposed to start using cash again?” angle. Or the Durbin angle — Senator Dick Durbin being the Illinois senator whose amendment to the new financial reform law, imposing a steep reduction in bank interchange fees, “forced” banks to search for ways to make up for the lost revenue. There’s even a presidential angle, with President Obama saying on Monday that banks didn’t have “some inherent right” to a certain level of profits — and then more or less withdrawing the remark the next day.

Me, I’m going with the gouging angle. The revenue that Bank of America, and many other banks, is seeking to replace with its new fees is lucre that a more honorable profession would never have touched in the first place. Indeed, 30 years ago, banks themselves would have turned their backs on it. Of course, back then, banks viewed customers as people to be helped, not marks to be taken advantage of.

It was, to be sure, a different world then, with regulated interest rates, the Glass-Steagall Act preventing banks from getting into lucrative trading and a sleepy business model that valued a steady dividend over a highflying stock price. As interest rates were deregulated, Glass-Steagall abolished and investors demanding that bank stocks perform like Internet stocks, that ethos changed. Banks began looking in some dark corners for new revenue; this is when hidden fees began to creep into credit-card agreements, for instance.

In retail banking, two new fees became crucial. One was overdraft fees, which gouged the least-sophisticated, least-wealthy customers by charging them $35 or so whenever their accounts were overdrawn.

The second source was interchange fees, which gouged merchants who accepted debit cards. Though merchants at first resisted debit cards, they eventually caved because banks made them so ubiquitous. Banks pushed debit cards in part because they are much less expensive to process than checks (which banks lose money on). But banks also got hooked on the absurdly high interchange fees they charged merchants — an average of 44 cents per transaction, even though it costs literally pennies to process a debit-card transaction.

In the summer of 2010, the Federal Reserve told the banking industry it could no longer charge overdraft fees unless customers “opted in.” To its ever-lasting credit, Bank of America, unlike its competitors, did not run a big scare campaign to persuade customers to agree to the opt-in. It chose to forgo the revenue, which amounted to some $3.3 billion, according to Credit Suisse.

The Durbin amendment tackled interchange fees. It called on the Federal Reserve to cap the fees at a level that “reasonably” accounted for the cost of processing transactions. Although the Fed’s final number was still ridiculously high — well over 20 cents — it will, nonetheless, cost Bank of America another $2 billion.

The news that Bank of America will impose the new debit card fee has infuriated many of its 50 million customers. But the bank insists that it’s not trying to alienate its customer base. Rather, a spokesman told me, the fee is part of “a much larger reconfiguration of our consumer business.” Next year, it plans to roll out a series of new offerings, most of which will be fee-based. Customers will be able to evade the fees only by maintaining large balances at all times.

One suspects that these new fees will only generate more anger, for they will make plain what has long been hidden: that, fundamentally, retail banking makes its money by gouging the have-nots. Post-financial crisis, the essence of big banking has not changed. It’s just become more obvious.

President Obama got it right the first time: Banks don’t have an inherent right to oversized profits. No industry does. Banks play a special role in society, and they get special protections from the government. In return, government has the right to impose special responsibilities.

Every person needs a bank, no matter how rich or poor. The government will never force Bank of America — or any other bank — to reduce or eliminate its fees; it doesn’t have the nerve. But, at the least, it could insist that banks display their fees in a uniform way so that customers can compare how they’re being gouged and make banking decisions on that basis. That kind of reform could stir competition and bring down fees.

This, of course, is precisely what the new Consumer Financial Protection Bureau is supposed to do — and would do if the Senate Republicans would ever allow a director to be approved.

But, sigh, that’s a column for another day.

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Banks to Make Customers Pay Debit Card Fee

Wells Fargo and Chase are testing $3 monthly debit card fees. Regions Financial, based in Birmingham, Ala., plans to start charging a $4 fee next month, while SunTrust, another regional powerhouse, is charging a $5 fee.

The round of new charges stems from a rule, which takes effect on Saturday, that limits the fees that banks can levy on merchants every time a consumer uses a debit card to make a purchase. The rule, known as the Durbin amendment, after its sponsor Senator Richard J. Durbin, is a crucial part of the Dodd-Frank financial overhaul law.

Until now, the fees have been 44 cents a transaction, on average. The Federal Reserve in June agreed to cut the fees to a maximum of about 24 cents. While the fee amounts to pennies per swipe, it rapidly adds up across millions of transactions. The new limit is expected to cost the banks about $6.6 billion in revenue a year, beginning in 2012, according to Javelin Strategy and Research. That comes on top of another loss, of $5.6 billion, from new rules restricting overdraft fees, which went into effect in July 2010.

And even though retailer groups had argued that lower fees were important to keep prices in check, consumers were not likely to see substantial savings. In fact, they are simply going to end up paying from a different pot of money.

Or as Jamie Dimon, chief executive of JPMorgan Chase, put it after passage last year of the Dodd-Frank Act, “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.”

Chase is now charging customers for a paper statement. It also, like many other banks, scrapped its debit card rewards program. And customers that Chase inherited from Washington Mutual no longer enjoy free checking accounts.

The bank is also exploring a number of other fee increases, including for online banking, according to people with knowledge of the matter.

Bank of America’s debit fee is steeper than most of its competitors’, reflecting the broader challenges the bank is facing after the financial crisis. The bank has introduced an online-only account that charges customers for doing business at a local branch. It also plans to apply its new debit card fees to anyone who uses the card to make recurring payments like gym fees or cable bills.

Citibank is one of the few that said it would not introduce a charge for debit card use. “We have talked to customers and they have made it abundantly clear that ‘if you charge me to use my debit card, I would find that very irritating,’ ” said Stephen Troutner, head of Citi’s banking products. Still, the bank has made it more difficult to qualify for free checking, among other moves.

Earlier this year, Wells Fargo estimated that the Durbin rules would cost the bank $250 million in revenue every quarter. It hopes to make up half that gap with a variety of new products and customer fees, including the monthly debit card fee of $3. The change is part of a “pilot program” the bank will begin on Oct. 14 in five states across the country, including Washington and Georgia. As of Saturday, the bank will discontinue its debit card rewards program.

Meanwhile, HSBC said that it recently increased an A.T.M. fee — to $2.50 from $2 — for certain customers when they used a competitor’s A.T.M. It also recently introduced a debit transaction fee of 35 cents, though the first eight transactions are free.

And at TDBank, customers will now have to pay $2 for using A.T.M.’s outside their network.

“Durbin essentially moves the cost of debit away from merchants, and now it’s more focused on consumers,” said Beth Robertson, director of payments research at Javelin. “There are all sort of things happening where banks are saying, where can we put fees in place for our service to generate revenue or how can we reduce our costs?”

Over the last few years, consumers have increasingly shifted their spending to debit cards from credit cards, in large part to curb their spending. But some analysts predicted that the new fees could prompt consumers to return to credit cards — a more lucrative alternative for the banks.

Consumers have already begun to react to the changes.

Patrick Shields, 48, said he had decided to leave Citibank, where he has held a small-business account for his residential window cleaning business since 1986. He was contemplating opening a personal checking account, but realized he could do better at a credit union.

“At the credit union, they opened it free of charges, which Citi could not and would not do,” said Mr. Shields, who noted that a personal checking account would have cost more than the one he uses for his New York business. “Now I have both accounts covered, and I am fee-free.”

The so-called Durbin rule quickly emerged as one of the thorniest provisions of Dodd-Frank, touching off a long and furious fight in Washington. Wall Street dispatched an army of lobbyists to tame the rule, ultimately yielding mixed results.

In June, the Senate defeated a measure that would have delayed the new rule. But just three weeks later, the Federal Reserve decided to cap the fees at 21 to 24 cents for each debit card transaction, a much lighter blow than once expected.

In a statement on Thursday, Senator Durbin, Democrat of Illinois, said that small businesses would benefit from the new limits. “Swipe fee regulation will still allow banks to cover the actual costs of debit transactions but will rein in the banks’ excessive profit-taking.”

Ann Carrns contributed reporting.

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Bucks: Prepaid Cards Subject Jobless to Host of Fees

When you’re getting unemployment benefits, you by definition don’t have a lot of cash to spare. So it seems especially unfair that people who receive their jobless benefits on prepaid debit cards are subject to a variety of fees they can ill afford to pay.

A report out this week from the National Consumer Law Center lays out a host of ways in which banks nibble away at jobless benefits with fees the center called “junk.” The prepaid cards are most often used by jobless recipients who don’t have checking accounts, and so are ineligible for direct deposit. Practices vary from state to state because jobless benefits are distributed at the state level, and state governments negotiate the terms of agreements with card providers. In many states, charges apply for using A.T.M.’s, even if they’re in network; checking balances; and even for not using the card enough (inactivity fees, as high as $3).

The report is especially critical of a card issued in five states by U.S. Bank, which charges overdraft fees of $10 to $20 if recipients use more than the amount on their cards. Charging an overdraft fee to someone who doesn’t even have a bank account struck me as particularly ingenious — what are they overdrawing, exactly?

U.S. Bank is able to do this, the report explains, because jobless benefits are typically paid into pooled accounts that then have subaccounts designated for individual recipients. In most states, if a recipient uses the card to make a purchase that exceeds his or her benefits, the transaction is simply denied. But in five states — Arkansas, Idaho, Nebraska, Ohio and Oregon — U.S. Bank lets the transaction go through, and then deducts the amount, plus the overdraft fee, from the recipient’s next benefits check. (The bank issues cards without overdraft fees in several other states.) Those fees can make a big dent, considering that the typical weekly unemployment check is just $294.

Teri Charest, a spokeswoman for U.S. Bank, said in an e-mail that overdraft protection is an option that states can choose to add to their prepaid card programs. But even when it is offered, cardholders must opt in to overdraft coverage. “The terms are clearly disclosed so cardholders are aware of the fee should they need to use it,” she said.

Other banks don’t charge such hefty fees, but some do charge “denial” fees, ranging from 25 cents to $1.50, when an attempted A.T.M. or retail transaction fails for lack of funds. Some even charge for live customer service calls or withdrawing funds using a human teller.

The practice occurs despite a directive from the Department of Labor stating that deducting “overdraft, overdraft fee, or denial fee” from future unemployment payments is “inconsistent” with federal law.

The “best” cards, offering free in-network A.T.M. withdrawals, at least two free out-of-network withdrawals, no balance inquiry fees and no inactivity fees, are offered in New York and New Jersey by Bank of America, the report found.

The worst for junk fees, in addition to the U.S. Bank version with overdraft fees, is the Tennessee card issued by JPMorgan Chase. It is one of only two states that fail to offer any free A.T.M. withdrawals.

The report recommends that smaller states band together for more clout when negotiating card terms with banks. And it urges the new Consumer Financial Protection Bureau to take up the cause of excessive fees on prepaid cards when it opens for business this summer. “We hope prepaid cards are high on the agenda,” said Lauren Saunders, managing attorney at the Consumer Law Center in Washington, and the primary author of the report.

Have you received jobless benefits on a prepaid card? What has your experience been?

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DealBook: Mortgage Woes Stall Bank of America’s Revival

Brian T. Moynihan, Bank of America's chief executive.Chuck Burton/Associated PressBrian T. Moynihan, Bank of America’s chief executive, is struggling to rebuild the bank after the financial crisis.

As big banks slowly shake off losses from the financial crisis, Bank of America provided another reminder on Friday of how hard it is to shed the legacy of the past.

Bank of America, the nation’s largest bank, reported that first-quarter earnings dropped 37 percent to $2 billion, reflecting the persistent burden of Countrywide Financial, the subprime mortgage lender it bought in 2008.

Two days earlier, its rival JPMorgan Chase announced that profits rose 67 percent over the same period, despite continued problems in its mortgage-lending unit.

The different results between the two financial giants underscore the continued challenges that Bank of America’s chief executive, Brian T. Moynihan, faces as he tries to rebuild a company weighed down by a troubled mortgage business in an uncertain economy.

“Other than the mortgage issue, Bank of America is having the same kind of recovery everybody else is,” said Chris Kotowski, an analyst at Oppenheimer Company.

In many ways, Bank of America and JPMorgan followed similar paths in the first quarter. Credit quality markedly improved, allowing the banks to release billions of dollars of reserves previously set aside to cover losses. Commercial lending is on the mend, and investment banking fees are rising.

The two banks are even struggling in the same ways, with revenues declining in the first quarter. Both were hit by new government regulations that limited overdraft fees and other lucrative sources of income. And their home-lending businesses continued to lose money, although loans were souring at a slower rate. At Bank of America, net charge-offs for the quarter were $6 billion, compared with $10.8 billion a year ago.

“We’re cautiously optimistic,” the departing chief financial officer, Charles Noski, said. Except for “our legacy issues, you have a business that has articulated its strength and we’re executing on it.”

But Bank of America won’t be able to escape its mortgage woes anytime soon. Its problems are not unique. Like its peers, Bank of America is dealing with a wave of litigation and government investigations related to its mortgage business — albeit on a grander scale given its acquisition of Countrywide, once the nation’s largest mortgage lender. The bank put aside an additional $1 billion in the first quarter to cover claims linked to Countrywide.

Compared with competitors, the bank has more loans on its books that are past due and nonperforming, according to a recent report by Oppenheimer. And it is unclear just how much liability the bank ultimately will face, a situation that continues to plague the bottom line.

“With Bank of America, you’ve got this special asterisk: There’s no precedent to judge their exposure,” Mr. Kotowski said. “If not for that, I would be recommending the stock.”

In a nod to its legal issues, Bank of America on Friday announced the creation of a new position, the global chief of legal, compliance and regulatory relations. The bank named Gary Lynch, formerly of Morgan Stanley and the Securities and Exchange Commission, to fill the role. Mr. Lynch, the S.E.C.’s enforcement director in the 1980s, carries clout on Wall Street and in Washington.

Bank of America also said that Mr. Noski would leave his post after only a year to tend to “a serious illness of a close family member.” Mr. Noski — who will be replaced by Bruce Thompson, the bank’s current chief risk officer — will remain at the company as vice chairman.

Shares of Bank of America closed at $12.82 on Friday, down nearly 2.4 percent.

Bank of America acquired Countrywide during the depths of the financial crisis for $4 billion — a price that seemed fair at the time. But Countrywide soon proved to be at the epicenter of the mortgage mess, and the costs have been piling up ever since.

Now, institutional investors, government-sponsored enterprises and mortgage-bond insurers want Bank of America to repurchase billions of dollars in bad Countrywide mortgages, which they say failed to meet underwriting standards. On Friday, the bank announced a $1.6 billion agreement with Assured Guaranty, the insurer that guaranteed several mortgage-bond deals backed by Countrywide loans.

The legal problems don’t seem to be abating, either. Bank of America paid about $3 billion to Fannie Mae and Freddie Mac in the fourth quarter of 2010 to settle the housing finance giants’ repurchase claims. Now, they want more — with claims of $5.3 billion, up from $2.8 billion in the fourth quarter of 2010.

The bank is among several firms ensnared in state and federal investigations into fraudulent foreclosure practices. The bank and 13 other firms signed an agreement with banking regulators on Wednesday to overhaul their foreclosure operations and adopt new oversight procedures.

But the bank and its peers still face demands from state attorneys general to make additional concessions, including a multibillion-dollar settlement.

“Countrywide is a disaster,” said Paul Miller, an analyst at FBR Capital Markets, adding that the first quarter’s problems “will not be the end of it.”

In contrast, the bank’s merger with Merrill Lynch, another marriage forged during the crisis, has fared far better. The global wealth management group, which includes Merrill, reported revenue of $4.5 billion, versus $4 billion a year ago. Earnings rose more than 22 percent.

It is a crucial time for Bank of America, which is hoping regulators will approve a plan to increase the bank’s token 1 cent dividend. In March, the Federal Reserve rejected the bank’s proposal to raise its shareholder payouts in the second half of 2011. The bank said on Friday that it would try again, although analysts are skeptical of its chances.

“I think, eventually, the bank will have to back off” from raising its dividend, said Marty Mosby, an analyst at Guggenheim Securities.

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