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Why Higher Bank Fees Could be Good News

Banking, an industry that has imposed steep costs on the American economy, is about to get even more expensive. Bank of America, the nation's largest bank, says it is going to levy a $5 per monthly fee on its debit card customers. The New York Times reports that Bank of America isn't alone. "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." Other institutions, like TD Bank, are tacking on fees for ATM use outside their network. Free checking could be a thing of the past.

As the banks stick it to customers, they're blaming it on regulations that have sapped reliable streams of revenue. The Dodd-Frank financial reform law says banks can only charge businesses 21 cents to process debit-card transactions, compared with an average of about 44 cents pre-reform. According to Javelin Strategy and Research, that could cost banks about $6.6 billion in annual revenue. Meanwhile, as the Times notes, new restrictions on overdraft fees are already costing banks about $5.6 billion per year. In effect, regulatory changes are pushing banks to change their business model.

But these fees really have more to do with banks' really poor decisions in 2005 and 2006 than with Congressional decisions in 2009. Companies routinely get hit with higher costs, by the market or by regulation. They don't always pass them on to consumers in transparent ways. Sometimes they eat the higher costs, or offset them with efficiencies or expense reductions elsewhere. Healthy, smart companies can frequently figure out ways to cope without loudly annoying their customers.

But banks aren't particularly healthy or smart, especially Bank of America. Check out this two-year chart of its stock. Three years after the Lehman Brothers crash, Bank of America has yet to put its credit and mortgage woes behind it. It is laying off 30,000 employees, cutting expenses across the board, and needs to shore up its capital to make up for massive losses in its mortgage business. If not for the toxic legacy of Countrywide Financial, which Bank of America acquired in 2008, it might not be imposing a fee at all. Or maybe the fee would only be two or three dollars a month instead of five. Yes, the regulations impose some easily quantifiable costs on banks, which they are now passing on to consumers. But what has been the cost to shareholders, consumers and taxpayers of the banks' reckless and stupid business decisions?

In some ways, the imposition of fees is a positive development. The concept of charging customers for a service is actually a more sustainable and intelligent way for banks to do business. In the boom years, banks took deposits, borrowed lots more in the capital markets, and then lent that money recklessly to homebuyers, companies, hedge funds and other banks. No questions asked. The truly huge banks like Bank of America and Citi used a chunk of their assets to start internal hedge funds and proprietary trading operations. During the housing-and-credit bubble, all this activity spun nice profits. And that meant banks could give away services like checking and ATM use.

But in 2008 and 2009, all those profits turned into losses — for shareholders and for taxpayers. And it has become that the nation needs a much more boring banking system. We need banks that deliver services to customers, not ones that manufacture, sell, distribute and trade debt for its own sake. Banks are useful when they provide credit to consumers and businesses who need it, and when they facilitate savings, payments, and the secure movement and storage of money. The core operation of a bank in the 21st century is really more like a logistics business -- like UPS or American Express. And logistics companies routinely charge customers to use their infrastructure. It costs money for Bank of America to maintain its offices, branches, ATM networks, and telephone support operation. Charging for basic services is a more respectable — and less dangerous — business model than giving away basic services and trying to make up for it by gambling in the capital markets.

Finally, big banks' efforts to make banking more expensive might provide an opportunity for smaller, better-managed credit unions and community banks — you know, the guys who didn't blow up and require government support — to get a leg up on their much larger competitors. Local banks could never compete with Bank of America or Chase on convenience, or scale. So long as the behemoths were offering free checking and ATM use, the small banks couldn't compete on price, either. But the imposition of fees offers banks an opportunity to differentiate themselves. (USAA, for example, announced that it won't start monthly fees for debit card use.) For years, the free services large banks have been providing have acted as something of a trap. Once you've got your life set up in a particular bank account — with direct deposit and automatic bill payment -- it's a big pain to switch. It's possible that these moves to charge people more money to spend money might push some people to move their money.

Daniel Gross is economics editor at Yahoo! Finance.

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm.

His most recent book is Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.