Banks Cashing In on Charges to Push Profits, Cover Costs : Institutions are increasingly dependent on fees as a source of income--as well as to steer customer behavior and pay for high-cost patrons.
Trisha Lane is hard on her body.
So far this year, the professional rodeo contestant, Hollywood stuntwoman and part-time model has broken her left arm, cracked her tailbone, fractured three ribs and sliced open her knee.
She’s also hard on her bank.
The 31-year-old deposits between 10 and 20 checks per month, always bypassing the automatic teller machine for the teller window. She writes up to 20 checks per month, uses her ATM card several times each week to get cash and pay for groceries, and calls the Bank of America 24-hour service line at least three times per month to move money between accounts and check her balances.
All of these services cost Bank of America money to provide, but by carefully managing her accounts and transactions, Lane avoids paying any fees. What does her bank think of her? “Probably a hassle compared to how much money I have in there,” she said. Bank of America officials decline to say so, but she’s probably right.
Banks and savings and loans, after all, are businesses. And in their push for profits, banking institutions know that some customers are more helpful than others.
With that in mind, most banks and S & Ls carefully structure their fees not only to cover their expenses and maximize revenue, but to influence the behavior of their customers and to select those who will help generate profits.
California United Bank in Encino, for instance, is almost exclusively interested in business accounts, and shoos away personal accounts by setting steep fees and keeping short hours. Alternatively, Fidelity Federal Bank, a Glendale-based S & L, lives on consumer deposits and offers among the lowest fees and minimum balance requirements in the region.
Despite their various strategies, most banking institutions have one thing in common: a growing dependence on fees as a source of income. Banks still make most of their money by making loans, but an increasing share of income is generated by a growing array of fees, including charges for monthly account maintenance, bounced checks, ATM transactions, cashier’s checks and sales commissions on investments.
Fee income represented 22% of the $334 billion in gross income for banks last year, double the percentage from a decade earlier, according to the Federal Reserve Board.
Fees “have become profit centers,” said Robert Heady, publisher of Bank Rate Monitor, a Florida-based industry newsletter. “Banks charge what they can get away with. And consumers are by and large not fee-sensitive. It’s really easy for an unaware consumer to be nicked for $100 to $300 a year.”
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Banking fees gained widespread media attention a month ago when First Chicago Bank began charging customers $3 for certain teller visits. The fee, roundly criticized by consumer advocates, is designed to encourage customers to do more of their banking at ATMs, which perform routine transactions more cheaply than human tellers can.
Some bankers freely admit that fees are a useful means of influencing customer behavior. Frank Ures, chief executive of American Pacific State Bank in Sherman Oaks, said the bank adopted a $4 check-cashing fee several years ago aimed at non-APSB customers. The fee was designed to discourage hordes of workers who were flocking to branches in North Hollywood and Sun Valley to cash their weekly work checks.
“Lines were out the door and around the block,” Ures said. “We had large business accounts that couldn’t even get into the bank.” After the fee was implemented, those workers “either established accounts with us, went to their own bank, or went to check-cashing places.” he said. “It helped clean out the lobby.”
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Most banks, however, don’t like to admit they have such motives. Bank of America offers discounts to customers who do all their banking through ATMs, but company spokesman Harvey Radin insisted that the bank does not structure fees to influence customer behavior.
“We’re not directing our customers; the customers are telling us what they want,” Radin said. If that is true, then wouldn’t customers also like the bank to waive its $2 charge on ATM transactions at non-Bank of America locations? “There are overheads involved,” Radin replied. Aren’t overhead costs also involved when customers see human tellers instead of ATMs? “We don’t think of it that way,” he said.
But analysts say banking institutions do think of it that way. The typical ATM transaction costs about 25 cents, while a routine teller transaction costs about $1.20, said Sanford Rose, a spokesman for First Manhattan Consulting Group, a New York-based financial consulting company. “Banks care mightily” about such cost differentials, Rose said.
Customers who visit tellers numerous times each week and maintain balances just above minimum requirements can cost institutions between $230 and $600 a year, Rose said. So banks do their best to control those costs and count on their best customers--those with high balances and low transaction activity--to make up the difference. “In any bank, the top 20% of customers subsidize everyone else,” Rose said.
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That means banking institutions rely on customers like George Ting, who owns a Northridge-based import-export business. The 50-year-old doesn’t pay fees on his checking account at Great Western Bank, but Great Western probably doesn’t mind because Ting keeps $70,000 in various savings, CD, retirement and mutual fund accounts.
“They make more money on those fixed accounts than by making peanuts [charging fees] on the checking account,” Ting said. “That’s why they give me lifetime free checking.”
Analysts trace the rise of fee income back to banking deregulation in the early 1980s. Through the 1970s, interest rates on deposits were set by federal regulators, which helped ensure fat profit margins between the rates banks charged borrowers and paid depositors. But competition that followed deregulation in 1980 narrowed profit margins on loans, analysts said, leading banks to turn to fees.
The trend accelerated during the early 1990s, when the recession reduced loan demand. Great Western, the second-largest S & L in the nation, has added 12 new retail banking fees since 1990, officials said. As a result, fee income at the Chatsworth-based institution was $140.7 million last year, more than double the $56.9 million collected five years ago.
Giant banking chains including Bank of America, Wells Fargo and First Interstate exert great influence over fee structures in the consumer banking market. Among 13 banks surveyed for this story, including 10 based in the San Fernando Valley and neighboring areas, most fee structures were tightly clustered around those set by the big chains.
There were a few notable exceptions. California United Bank, for instance, charges a $15 monthly fee on basic checking accounts, while most banks charge about $8. The bank also requires a daily minimum balance of $2,500 to avoid the fee, while most others require $1,000 or less. And while most banks offer extended and Saturday banking hours, California United is open just five hours a day and offers no Saturday hours.
Officials at California United refused to discuss the bank’s strategy, but analysts said the institution’s fees make its market position clear. “Their mission is to serve small businesses, not consumers,” said Jim Marks, a banking analyst at Sutro & Co. in San Francisco.
Like many local institutions, California United had branched out into other retail banking services in the late 1980s, but was chastened by heavy losses incurred during the early 1990s. A new management team that took control of the bank in 1993 “had to basically strip the bank down to its [business banking] core to get rid of all the problems,” Marks said. Since then, he said, “they’ve been too busy cleaning up and getting back on track to be expanding into different areas.”
Fidelity Federal Bank resides at the opposite end of the spectrum. The S & L, which nearly collapsed under the weight of bad loans during the recession, has almost no business accounts and lures consumer accounts with a friendly fee schedule.
In stark contrast to most banking institutions, Fidelity offers a basic checking account with no monthly fee, no minimum balance and no ATM charges even at non-Fidelity locations. Fidelity also offers an interest-bearing account that pays a 3% annual rate--twice what most pay--and requires a minimum balance of just $500, less than half the balance required by many competitors.
Jennifer Cobbs, sales director at Fidelity, acknowledges that the checking accounts are basically loss leaders--accounts offered below cost to attract customers who might be tempted to spend money on other products. “The way we make money is through all the other areas,” Cobbs said, “loans, credit cards, securities, insurance, financial planning and mutual funds.”
Sales of such products helped boost fee income to 13% of Fidelity’s total income last year, compared to just 6% in 1990. So Fidelity’s checking accounts might be considered bargains, but they aren’t exactly charity. “Obviously, we’re in this business to make money,” Cobbs said.
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A Comparison of 13 Banks and Savings & Loans
American Pacific State Bank Basic personal checking accounts Monthly fee: $8.00 Daily balance to avoid fee: $750 Interest-bearing checking accounts Daily balance to avoid fee: $2,500 Annual interest rate: 1.75% Bounced check fee: $20 ATM withdrawal fee except at home bank locations: $1.00 % of tellers who are full-time employees: 89% Number of branches in California: 7 Typical branch hours: M-Th 9-4; F 9-6; S 9-12
Bank of America Basic personal checking accounts Monthly fee: $8.00 Daily balance to avoid fee: $750 Interest-bearing checking accounts Daily balance to avoid fee: $1,500 Annual interest rate: 1.00% Bounced check fee: $10 ATM withdrawal fee except at home bank locations: $2.00 % of tellers who are full-time employees: less than 5%* Number of branches in California: 997 Typical branch hours: M-Th 9-6; F 9-7; S 9-2
Bank of Encino Basic personal checking accounts Monthly fee: $7.00 Daily balance to avoid fee: $1,500 Interest-bearing checking accounts Daily balance to avoid fee: $3,000 Annual interest rate: 1.50% Bounced check fee: $12 ATM withdrawal fee except at home bank locations: $1.00 % of tellers who are full-time employees: 100% Number of branches in California: 1 Typical branch hours: M-Th 10-3; F 10-4
California United Bank Basic personal checking accounts Monthly fee: $15.00 Daily balance to avoid fee: $2,500 Interest-bearing checking accounts Daily balance to avoid fee: $2,500 Annual interest rate: 1.50% Bounced check fee: $10 ATM withdrawal fee except at home bank locations: $1.00 % of tellers who are full-time employees: N/A Number of branches in California: 5 Typical branch hours: M-F 10-3
Charter Pacific Bank Basic personal checking accounts Monthly fee: $6.00 Daily balance to avoid fee: $500 Interest-bearing checking accounts Daily balance to avoid fee: $1,000 Annual interest rate: 2.00% Bounced check fee: $15 ATM withdrawal fee except at home bank locations: $1.00 % of tellers who are full-time employees: 100 Number of branches in California: 3 Typical branch hours: M-Th 9-4; F 9-6
Fidelity Federal Bank Basic personal checking accounts Monthly fee: $0.00 Daily balance to avoid fee: $0 Interest-bearing checking accounts Daily balance to avoid fee: $500 Annual interest rate: 3.00% Bounced check fee: $12 ATM withdrawal fee except at home bank locations: $0.00 % of tellers who are full-time employees: 40% Number of branches in California: 33 Typical branch hours: M-Th 9-4; F 9-6; S 9-1
First Interstate Bank Basic personal checking accounts Monthly fee: $8.00 Daily balance to avoid fee: $750 Interest-bearing checking accounts Daily balance to avoid fee: $3,000 Annual interest rate: 1.00% Bounced check fee: $15 ATM withdrawal fee except at home bank locations: $2.00 % of tellers who are full-time employees: 3% Number of branches in California: 428 Typical branch hours: M-Th 9-5; F 9-6; S 9-1
Glendale Federal Bank Basic personal checking accounts Monthly fee: $6.00 Daily balance to avoid fee: $800 Interest-bearing checking accounts Daily balance to avoid fee: $1,500 Annual interest rate: 1.15% Bounced check fee: $12.50 ATM withdrawal fee except at home bank locations: $1.00 % of tellers who are full-time employees: 50% Number of branches in California: 135 Typical branch hours: M-Th 9-4; F 9-6; S 9-1
Great Western Bank Basic personal checking accounts Monthly fee: $8.00 Daily balance to avoid fee: $750 Interest-bearing checking accounts Daily balance to avoid fee: $1,500 Annual interest rate: 1.01% Bounced check fee: $12 ATM withdrawal fee except at home bank locations: $2.00 % of tellers who are full-time employees: 24% Number of branches in California: 299 Typical branch hours: M-Th 9-4; F 9-6; S 9-3
TransWorld Bank Basic personal checking accounts Monthly fee: $7.75 Daily balance to avoid fee: $750 Interest-bearing checking accounts Daily balance to avoid fee: $2,000 Annual interest rate: 1.01% Bounced check fee: $18 ATM withdrawal fee except at home bank locations: $1.50 % of tellers who are full-time employees: 75% Number of branches in California: 11 Typical branch hours: M-Th 9:30-4; F 9:30-6
Valencia National Bank Basic personal checking accounts Monthly fee: $8.00 Daily balance to avoid fee: $1,000** Interest-bearing checking accounts Daily balance to avoid fee: $2,500** Annual interest rate: 1.00% Bounced check fee: $15 ATM withdrawal fee except at home bank locations: $1.00 % of tellers who are full-time employees: 85% Number of branches in California: 3 Typical branch hours: M-Th 9:30-4; F 9:30-6
Ventura County National Bank Basic personal checking accounts Monthly fee: $6.00 Daily balance to avoid fee: $2,500 Interest-bearing checking accounts Daily balance to avoid fee: $2,500 Annual interest rate: 1.9% Bounced check fee: $15 ATM withdrawal fee except at home bank locations: $0.00 % of tellers who are full-time employees: 81% Number of branches in California: 4 Typical branch hours: M-F 9-5
Wells Fargo Bank Basic personal checking accounts Monthly fee: $9.00 Daily balance to avoid fee: $750 Interest-bearing checking accounts Daily balance to avoid fee: $1,500 Annual interest rate: 1.00% Bounced check fee: $10 ATM withdrawal fee except at home bank locations: $2.00 % of tellers who are full-time employees: 12% Number of branches in California: 615 Typical branch hours: M-F 9-6; S 9-2
* Bank of America officials declined to provide an exact figure.
** Average daily balance calculated monthly.
All figures reported by the banks and S&Ls; as of June 16, 1995
