How would you like to pay $ 51 dollars for a $1.70 cup of coffee at Starbucks or $ 16,500 dollars for a 550 dollar small laptop computer from Comp USA or even $75 dollars for a 2.25 gallon of gas?! Sounds preposterous right?
Wrong! Banks are charging in many cases over 3000 % mark-up over their costs for many of their basic services from overdrafts and wire transfers to account fees.
I continue to be dumbfounded at how banks are reporting historic loses. It's really quite simple; banks make money by charging interest on loans. In fact they have preserved the old “3-6-3 rule,” bankers paid a 3 percent rate of interest on deposits, charged a 6 percent rate of interest on loans, and then headed to the golf course at 3 o’clock.
Even though this is known as banker’s banter, the “3-6-3 rule” mixes a grain of truth with a hard dose of reality. Today the joke is on us with the NEW BANK RULE, ".65 - 5 to 27% - 3! According to the New York Federal Reserve statistics, banks today typically pay on aggregate less than 1%(.65%) for all deposits and charge an alarming 5% to 27% interest.
Unquestionably, the interest margin banks earn by intermediating between depositors and borrowers continues to be the primary source of profits for most banking companies. But banks also earn shameful amounts of non-interest income by charging their customers fees and penalties in exchange for a variety of financial services.
Over the last decade, advances in information, communications, and financial technologies have allowed banks to produce many of their traditional services far more efficiently for only pennies on the dollar. These efficiencies have clearly not been passed on to the "Valued Customer".
For example, banking cost of ownership statistics and metrics will tell you that world class banks can process a wire transfer for $1.75 but the cost to the customer is a whopping $45.00. A simple overdraft on a checking account routinely costs about $1.50 - the charge to the valued customer is about $35.00 to $50.00.
Personally I find this situation infuriating, having worked in banking over the course of 25 years. When a branch manager looks you in the eye and acts like he is doing you a huge favor by cutting the penalities in half. The reality is instead of charging you 3000% markup he is giving you a deal by only charging you 1500%.
The ABA described these exception fees as “avoidable” through some simple changes. The banks have conditioned us into thinking that it is our fault for these fees and if only we managed our money better they could be avoided. The fact is the banking industry is exploiting the public because we have become so dependant on their services. All banks are complicit – they know what the real costs are and what they end up charging the customer.
The bottom line is that banks have to change their outdated business model and come up with creative ways to increase revenues and drive efficiency, rather than charging shameful fees to people who can least afford them.
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Jay, I have to say, I have always known that bank fees were excessive. But I had no idea that banks were no better than a racketeering outfit, ready to extort whenever possible. I, like you, am sick of being swindled by an organization pretending to be respectable. These guys are no different from the mob! Great piece!
ReplyDeleteHi Jay.
ReplyDeleteWhy doesn't some bank lower profits to reasonable
amounts, pay much higher interest, charge much
lower fees, and gather up all of the customers?
There are two possible answers.
Either:
1. Your analysis is incorrect. To bolster your
analysis, you should show a balance sheet and
Profit and Loss statement for a bank and explain
where they are hiding their enormous profits.
Or:
2. The banks are complicit with each other and
plotting together. I.e., a distributed monopoly.
Aren't there anti-trust laws against that kind
of thing? If so, why are they not being enforced?
Dennis