Ever since the financial crisis, banks have had to face an
uncomfortable truth: With public opinion against them, they
nevertheless need to take steps to shore up their revenue. Although
some of the actions they've taken may work in the short run, what
banks are doing will eventually result in a huge customer revolt
that could threaten their very existence.
It seems like every month, you find a new fee that banks are
imposing on their customers. Whether it's the
clampdown on free checking
(NYSE: WFC) and
Fifth Third Bancorp
(Nasdaq: FITB) implemented last year or
annual fees for certain credit cards
) , big banks are doing their best to make up the revenue lost from
credit card and debit card legislation over the past few years.
The latest fee
Unfortunately, the latest bank attempt to raise revenue hits people
who are least able to absorb additional costs: CD investors. For
years, bank customers have had to accept rock-bottom rates on
certificates of deposit
, which involve savers tying up their money with a bank for a set
period of time.
The new fee targets those who withdraw money from their CDs
early. Traditionally, the early withdrawal penalty has been tied to
the amount of interest an accountholder receives. For instance,
someone tapping into a CD early might have had to give up anywhere
from three months' to a year's worth of interest as an early
But with rates so low, banks found themselves hoist with their
own petard. Since penalties for early withdrawal were based on
interest, banks that paid almost no interest gave savers very
little incentive not to break CDs early. That in turn encouraged
savers to take on long-term CDs that paid somewhat higher rates,
safe in the knowledge that they could also take out money early and
often still end up ahead.
It'll cost you
Bank of America
(NYSE: JPM) have made changes to their early withdrawal penalty
policies to make sure that customers pay a real penalty no matter
how low their interest rates may be. Bank of America will charge a
flat $25 fee regardless of how much someone takes out, plus between
1% and 3% of the amount withdrawn. Chase has a similar $25 plus 3%
Now granted, the fees do make some sense. When interest-based
penalties aren't enough to deter savers from breaking their CDs,
banks have to raise fees to restore the incentive for savers to
stick with the CD's original terms and to cover their own
But at some point, fees will hit the breaking point for banks.
Opponents are pointing to the fact that the new fees result in
1,600% to 1,700% increases. It's as if banks had taken a lesson
from annuity providers like
American Equity Investment
) , which earned more than half its net income in 2009 from
-- the annuity equivalent of early withdrawal fees.
When will customers finally rebel? According to research at the
Wharton School of Business, the key is to keep customers convinced
that fees are reasonable. Small fees that are tied to actual costs
have a better chance at gaining acceptance than the blanket
approach that many banks are taking. Just as
has gained in reputation from spurning baggage fees, so too will
innovative banks eventually put the big banks at a big disadvantage
by giving customers what they want.
Don't put up with it
As a saver, when you open a CD, make sure you understand its terms.
If the fees they impose are too onerous, the solution is easy: find
another bank. In the long run, banks that overreach for short-term
profit relief through fee income are going to get a nasty surprise
from smart savers who are mad as hell and won't take it
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thinks banks make plenty without help from higher fees. He
doesn't own shares of the companies mentioned in this article.
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