Banks and Customers in Shaky Balance
All too often, it’s an uneasy truce: People need banks; banks need people.
And, as alliances go, this one has been about as shaky in recent years as it has ever been in the banking industry’s long, long history.
“The biggest crunch the consumer is in today is in this, the banking field. There have been more changes in banking in the last four years than in the previous 40,” according to Stephen Brobeck, executive director of the Washington-based Consumer Federation of America, an affiliation of more than 200 local and regional consumer groups with individual memberships exceeding 30 million.
“Every single consumer-banking product has been affected, and it’s a continually growing array of baffling options,” Brobeck continued. “Some of them are very expensive, and others represent a very good deal--but which is which?”
On a recent trip into Los Angeles to meet with local consumer groups, Brobeck also took time to plug the federation’s latest publication, “The Bank Book,” a 222-page guide for wending one’s way through darkest banking--how to compare fees and other costs; how to earn maximum interest on checking, savings and NOW (Negotiated Order of Withdrawal) accounts; how to use credit cards wisely; when, where and how to borrow money and a host of other related topics. Co-authored by Brobeck and Naphtali Hoffman, associate professor of economics at Elmira College in New York State, “The Bank Book” is available through the Consumer Federation of America, 1424 16th St. N.W., Suite 604, Washington, D.C., 20036, for $6.95 ($5.95 plus $1 for postage and handling).
“Until about 10 years ago,” Brobeck says, “banking was a quasi-utility. Banks were limited, geographically, as well as in the services they could offer and the interest they could charge. And so they competed with concrete--throwing up branch offices on every corner, giving away toasters for opening new accounts, all of the old merchandising gimmicks.
Deregulation Changes
“And then, about four years ago, came deregulation,” Brobeck continued, “and the marketing people looked around and suddenly saw that there was a lot more potential in consumer services than in the traditional banking activities.
“Here was an area where the traffic would bear high charges without complaint. Here was where the consumer was pretty illiterate--not dumb, mind you, but simply not able to cope with the complexity of it all. I’m a professional consumerist, and I bog down in it.”
Almost overnight, the banks found themselves making higher profits at less risk with their consumer services than in any other banking area, Brobeck says. Wide disparities became commonplace. Even as interest rates today have plummeted--passbook savings account interest rates have dropped to the 5%-to-5.5% range in California and are as low as 4% at two Philadelphia banks--the interest rate on bank credit cards has remained stubbornly high. As high as 22% in some areas and, nationally, still averaging in the 18%-to-20% range, despite efforts in almost every state legislature to put a cap on such charges.
Repeated attempts in Sacramento along these lines drop like flies, and the legislation that does pass, weakly requires the credit grantor to divulge its interest charges at the time of application.
Banks, in rebuttal, claim that their cost of money--basically the discount rate--represents less than half their expenses, such as the cost of investigating applicants, billing, processing and heavier-than-normal fraud and default losses.
Obviously, Brobeck noted, the ability of the consumer to “shop” for the best credit-card rate is sharply limited in the face of such near-unanimity in rates. For those who pay their balance in full each month to avoid interest charges--and that’s a rather remarkable one-third of all credit-card holders--bargain hunting is similarly restrictive.
According to Bank Card Holders of America, one of the consumer groups supplying source material for “The Bank Book,” there were only eight card issuers nationally that levy no annual fee on their cards, as of last June. Although, the group concedes, this is probably not a complete list because its periodic listing of such banks is limited to those that have been called to its attention. (For a more current listing of banks that charge no annual fee, contact Bank Card Holders at (800) 638-6407.)
There’s a curious irony here. Shopping for the best credit-card terms is difficult because there is so little difference from bank to bank, but shopping for the best deal on other services is equally as complicated because the variances are so wide.
“Right here in Los Angeles,” Brobeck says, “you can find one bank offering free checking service with a minimum balance as low as $300, while across the street in another bank, you have to maintain a balance of $1,500 for the same thing.
“Nationally, some NOW accounts charge as much as $25 a month, in addition to a transaction charge, for a checking account alone, while there is frequently a 2% spread in the interest paid on a passbook account and a Certificate of Deposit,” Brobeck says.
“If you’ve got $10,000 in a passbook account--and it’s amazing how many people keep much more than that in such an account--it means you’re losing $200 a year in interest when it would take maybe 10 minutes to switch over to a CD account.
“I don’t know why they do it,” Brobeck says in some awe, “but according to the Federal Reserve Board, Americans keep more than $300 billion in these low-yielding passbook savings.”
The charge for bouncing a check also defies logic and is one of those banking activities that not one person in a thousand inquires about before he learns his bank’s position the hard way.
“When the New York State Legislature asked that state’s banks to conduct a study and arrive at a firm estimate as to what it really costs to process an Insufficient Funds check,” Brobeck added, “the highest figure they could come up with was slightly under $5. And yet the average charge, nationally, is in the $14-to-$15 range, and Philadelphia’s banks are, by far, the highest. The average charge there is $25, and one bank charges $40--which may also explain why, in Philadelphia, bounced check charges represent about one-third of net banking income.”
No Evident Reversal
Even though there has been no visible evidence that there has been a reversal in certain banking trends that developed after deregulation and that--critics say--are penalizing low- and moderate-income families, there are some grounds for optimism, Brobeck feels.
“One bright spot is that the escalation of fees and minimum balances seem to have slowed down,” he added.
“We don’t really know, since deregulation, how many families have left the traditional banking system because the Federal Reserve only surveys this every six or seven years. Between ’77 and ‘83--the last survey--the number of families with checking accounts had declined 12%, from 56% to 44%. To a lesser extent, the same percentage drop took place in savings accounts.
“This is why,” Brobeck says, “you’ve had such a proliferation of check-cashing and money-order services being offered by liquor stores and convenience stores. And while, nationally, we’ve found check-cashing services charging about 2% of the face value of the check, we’ve also found them going as high as 10%.”
And while it is in its infancy, Brobeck also sees another encouraging trend in the banking industry.
“An increasing number of California banks are now offering basic checking accounts--it’s not adequate yet, but there’s a definite move in that direction. The ultimate goal, of course, would be to have all financial institutions offering a checking account that either requires no minimum balance, or, at the most, $100.
“We recognize, of course,” the Consumer Federation’s executive director says, “that there’s a higher cost involved in servicing such accounts, and so we can also appreciate the banks’ needs to limit activity in them and impose a relatively stiff fee when it’s exceeded.”
But more important than the mere spread of these basic accounts, he feels, is the subtle shift in long-term philosophy that it represents on the part of some banks--California’ Security Pacific being cited by Brobeck as a good case in point.
“There’s never going to be a huge demand for these basic accounts because of their limitations,” Brobeck added, “but Security Pacific’s strategy is that, for the short term, the fee should simply cover their costs. But, for the long term, the idea is to build loyalty to Security Pacific among younger workers. As they become older and bigger customers that loyalty will make them more profitable customers too. Security Pacific, so far, is very pleased with the experiment.”
“Bank loyalty?” It’s the rebirth of an idea that used to be a mainstay of the banking industry but that, after deregulation, became--or almost became--as dated as the practice of giving away free toasters.
Don G. Campbell cannot answer mail personally but will respond in this column to consumer questions of general interest. Write to Consumer VIEWS, You section, The Times, Times Mirror Square, Los Angeles 90053.
