Why Big Banks Deserve to Get Slammed
They're rolling their eyes on Wall Street yet again.
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The latest affront to the nation's big banks comes from Richard Cordray, head of the new Consumer Financial Protection Bureau, who said recently that he plans to investigate bank overdraft fees and perhaps issue new rules to rein in bank practices that could be misleading or even abusive. Banks have increasingly turned to such fees to help offset losses they've suffered through bad loans, poor investments, and new restrictions meant to limit risk-taking.
To the banks, the latest news from Washington represents a continued assault on the livelihood of fine working Americans, and on free enterprise itself. Since the 2008 financial crisis, banks have had to endure all manner of indignity, including limits on bonuses paid to executives, congressional hearings meant merely to embarrass them, strict new rules that limit profitability, and a grandiose 49-state investigation into foreclosure practices that served largely as a grandstanding opportunity for politicians. That's in addition to finicky shareholders who sell their holdings and push bank stocks down every time there's a wobble in the financial markets.
The banks, however, seem not to have learned a vital and simple lesson: They have become their own worst enemy. Big banks have become so corporatized and inhumane that taking potshots at them is like criticizing Iran or swatting flies: Practically nobody in America objects.
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Before discussing why, it's important to point out that the financial industry is a key part of the U.S. economy. The financial sector accounts for about 6 percent of all jobs in the United States, and a much higher share of income, since banking jobs tend to be high-paying ones. That's a good thing: Finance is precisely the kind sophisticated, highly skilled work the U.S. economy needs more of. Protesters who call for dismantling the banks and seizing their profits are targeting one of the key advantages the U.S. economy still has over upstarts like China and the more highly regulated and static economies of Europe.
Yet the global banking business has become so obsessed with efficiency and profits that it has disconnected itself from the people who form its customer base. Virtually everything about banking has become aggregated and synthesized. Mortgages and car loans are no longer held by the bank that originated them, but are instead rolled into complex financial products that are sold off to investors anywhere in the world. There's far more emphasis on trading huge blocks of securities than in servicing local customers. To save money, banks are now encouraging customers to use ATMs and online banking to do nearly everything a teller used to handle, with long lines at the local branch the punishment for cretins who don't comply.
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The modern banking model blew up during the 2008 financial crisis, when the banks needed billions of dollars of bailout money from Washington to prevent a run on the entire financial system. That's well known by now. What's remarkable is that the banks have done practically nothing since then to rehabilitate their image or make nice with the taxpayers who bailed them out. In fact, banks have arguably become even more reprehensible since then, on account of new efforts to dun consumers--especially low-balance customers who are the most vulnerable.
One particularly obnoxious practice is the way some banks deduct bigger payments from a customer's account before smaller ones--regardless of chronological order--which is a deliberate effort to drain the account and then charge fees for overdraft "protection." It sounds like some kind of mob shakedown, and it's one of the practices Cordray is supposedly going after.
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Banks also charge fees for a mind-boggling number of things that make it hard or impossible for consumers to keep track of what they're being charged for. Some banks levy something called a "foreign transaction fee," which has nothing to do with overseas charges but relates to withdrawals from another bank's ATMs. There are sometimes fees for using a teller, contacting a bank representative on the phone, transferring money between accounts, or making too many transactions in a given month. Banks are required to list all these fees on a fee schedule that they must provide to customers who ask for it, but banks rarely advertise all the fees they charge and obviously they hope customers won't notice.
This is completely out of step with customer service in the Internet era. There are countless examples of companies that get dinged for trying to put one over on their customers. Netflix, once beloved, faced a revolt by its customers last year when it tried to split its streaming and DVD-by-mail services into two separate plans, requiring separate accounts for each. The company reversed itself, but still suffered a punishing plunge in its stock price. Even Apple provokes the ire of its fanatically loyal customers if a software upgrade goes awry or iPhone reception is sub-par.
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Banks, meanwhile, continue to try out new policies that seem to be designed by computerized executrons who view every customer as an entry on a spreadsheet. It didn't take consultants from McKinsey to predict, for instance, that Bank of America's ill-fated idea last year to charge debit card holders $5 per month for the privilege of accessing their own money would provoke outrage. All it took was somebody with common sense who knows what it's like to try to make the family budget add up when times are tough. Apparently there are no people like that running banks.
Consumers, for their part, need to realize that banking is a service that has value, and not an automatic birthright. Yeah, it's tough to adjust to paying for something that used to be free, like a low-balance checking account or the use of ATMs anywhere in the country. But banks do have a right to make money, and to charge for the services they provide. The key is to be upfront about those charges and give consumers a fair chance to make a different choice. That's what airlines have done, by lowering airfares but imposing new fees for meals or checked bags. Fliers grumble, but they know what they're getting into ahead of time, and they have the option to find a different airline or take a bus.
To make right with consumers, banks could do the same thing that fast-food restaurants or gas stations do: publish their prices prominently and go out of their way to avoid fine-print fees that are sure to enrage customers. But for some reason, a sneaky mindset prevails and banks are more inclined to treat their customers like captives they're able to exploit. Until that changes, banks deserve whatever hammer regulators use to encourage better behavior.
Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success, to be published in May. Follow him on Twitter: @rickjnewman
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