Banks may still be a safe place to stash your cash, with the FDIC now insuring up to $250,000 per depositor. But after years of lending money to just about anyone with a pulse, the industry is paying a steep price. Losses on bad loans issued during the credit bubble could top $1.4 trillion, according to the International Monetary Fund. With their balance sheets in tatters and stock prices in the gutter, some of America s biggest banks have been forced to merge to survive. And even with the U.S. government infusing money into the system to get banks lending again, the days of easy credit are gone, says Greg McBride, senior financial analyst with Bankrate.com.
Customer service also seems to be a casualty of the credit crunch. With less money coming in, many big banks are cutting jobs, closing branches, and scaling back their call-center operations, says Mike Moebs, a bank industry consultant in Chicago. Moreover, employees left on the job now have to handle more customers and may have less flexibility to ease up on fees for overdrafts or other services. Customer service is waning at the big banks, says Moebs. It s a downward spiral.
Don t look now but punitive fees for overdrawing your account, say, or using a competitor s ATM are increasing. The average ATM service charge doubled between 1998 and 2007, and overdraft fees brought in $17.5 billion in revenue in 2006, up from $10.3 billion in 2004, according to the Center for Responsible Lending. Rubecca Hegarty, a married mother of three in Woodridge, Ill., says she often pays upwards of $100 a month in overdraft fees to Chase, since, like most banks, it changes the order of purchases so that large debts get paid first increasing the likelihood of incurring fees on smaller purchases. JPMorgan Chase says it does this because big payments like a mortgage are more important to consumers, so they get priority.
Revenue from penalties can be addictive for banks, says Harvard Business School Professor Gail McGovern, but They re going to face problems from angry customers, which leads to big callcenter bills, employee dissatisfaction, and turnover.
Regardless of what your credit card agreement says, you can never be sure how much interest banks will charge you. For example, nearly all cards have a default rate as high as 30 percent which banks apply when you ve done something wrong, usually after two late payments in 12 months. But some banks have cut that to one, says Curtis Arnold, founder of CardRatings.com.
Banks can also change the terms of your agreement, raising rates when they like (though you can opt out and pay off the balance at the old rate as long as you never use the card again). Bank of America did that recently, upping many cardholders rates from 10 or 12 percent to 27 percent or more, even though they d done nothing wrong. There s no clarity on what criteria can lead a bank to raise interest rates, says Robert Manning, director of the Center for Consumer Financial Services at the Rochester Institute of Technology. It s a black box. A Bank of America spokesperson says the company periodically reviews the credit risk of its accounts and adjusts rates accordingly, adding that in the past year 94 percent have had no increase.
Students are the customers of the future, and banks are increasingly courting them, sometimes right on campus. More than 120 universities have cut deals with banks to issue student-ID cards that are also ATM and check cards. Schools can make millions from these deals, sometimes even taking a small cut of individual purchases.
Students are also a hot market for credit card issuers; banks will make private deals with alumni associations to get contact info for students, parents, and ticket buyers to university athletic events. Card companies cut deals to set up booths on campus, and Chase even inked a deal with Facebook to display ads and set up a Chase group on its website.
The problem? Mounting credit card debt among college kids, for one. Universities don t negotiate on behalf of students, says Manning. They re negotiating the best deal for the university. A spokesperson for the National Association of Independent Colleges and Universities says don t blame schools banks would market to students anyway, and universities at least try to get the best rates they can for students.
Since the late 1990s, banks have been including mandatory arbitration agreements in their contracts for many of their products, including auto loans, checking accounts, home-equity loans, and credit cards. Such agreements prohibit you from suing and instead require you to use an arbitrator someone picked by the arbitration firm named in your credit card contract to hear the dispute and decide the outcome.
While these clauses were originally designed to thwart class-action suits, the banks have also been using them for debt collection, says Paul Bland, an attorney with consumer-advocacy group Public Justice. There are even times when consumers, often victims of identity theft and unaware of the debt, aren t present when awards are handed down against them.
A recent suit against an arbitration firm brought by the San Francisco city attorney noted that arbitrators ruled in favor of banks in 100 percent of the 18,045 California cases brought against consumers from January 2003 through March 2007. From the consumer perspective, it s a nightmare, says Bland. If a bank brings arbitration against you, hire a lawyer and request a hearing in person.
It s not bad enough that the dollar is hovering near historic lows against most major currencies, but when you travel overseas, every transaction comes with big fees attached. Take out cash from an ATM in London, and you ll get hit with a foreign-transaction fee, plus a fee for using a competitor s ATM. All told, it can cost up to $7 just to withdraw $200. Credit card purchases aren t much better. Visa and MasterCard each charge 1 percent of the purchase for converting currency. And the issuing banks may take another cut, which can bring the total to 3 percent of your purchase price, says CardRatings.com s Arnold. If people don t travel overseas very often, they just don t think about it, he says.
The best thing to do is see which of your cards charges the lowest overseastransaction fee. If you travel a lot, Arnold recommends a Capital One credit card, which charges no overseas-transaction fees (even refusing to pass on Visa and MasterCard s 1 percent fee to customers). Also, ask your bank about partnerships with foreign banks. Bank of America, for example, partners with Barclays Bank, saving its customers $5 per withdrawal from the latter s ATMs in the U.K.
Bank documents come loaded with small type, detailing terms and conditions. But good luck finding out exactly what you re signing up for when you open an account. In 2007 the Government Accountability Office (GAO) sent investigators to see how well banks explained their fees and other conditions to potential customers. Though banks are required by law to make this information available, the GAO found that one third of the branches it surveyed didn t provide the required information. Worse, more than half didn t have any fee information on their websites.
Nessa Feddis, senior counsel at the American Bankers Association (ABA), questions the report s methodology banks failed the test if investigators waited more than 10 minutes for the information and defends the lack of data online. Banks are afraid of leaving old, inaccurate information on their site if terms change, she says. But without details on fees, consumers can t make educated choices. Banks are not complying with the law, says Ed Mierzwinski, consumer program director with the U.S. Public Interest Research Group. People need more information so they can shop around for the best deal.
Banks offer lots of ways to earn interest on your money among them, simple savings, CDs, money-market accounts, and IRAs. But they don t always yield the best return. In early 2009, the average savings account, for example, was paying about 0.5 percent interest. But even in this low-interest-rate climate, you can do better 3 percent or more if you shop around. It pays to be a free agent, says Bankrate.com s McBride. There is tremendous disparity in the returns available.
Banks have been expanding into other financial services for a decade or more, including comprehensive wealth management and financial planning, brokerage services, even insurance. The well-off customers who use these are a bank s most profitable; they keep the highest balances and are less sensitive to fees, says Maryann Johnson, senior vice president of wealth market management at the ABA. That s something to remember when you talk to a bank s investment advisers: Many are paid a commission on investment products, says Certified Financial Planner Craig DuVarney, meaning they often go for the easy sale. They don t have the harder discussion about estate planning, tax bracket, and liquidity, says DuVarney. Johnson sees it differently; she says banks take a more holistic approach and that their wealth managers serve much the same purpose as financial advisers, with bonuses for not only sales but also dollars invested, new clients, and even customer retention.
Banks have been consolidating like crazy over the past decade. In 1990 the top 10 banks controlled 25 percent of the market; by 2008 they controlled half. This gives customers of large banks vast networks of free ATMs and branches across the country. But it hasn t been entirely good for consumers, says Arthur E. Wilmarth, Jr., a professor at George Washington University Law School. Though big banks offer many conveniences, they can come at a price: high fees. In 2006 the 10 largest banks generated 54 percent of revenue from fees and service charges; by contrast, the 10 smallest banks generated just 28 percent from those sources.
Not only do big banks bring in more fee income but they also pay out less interest. According to FDIC data, smaller banks generally pay higher interest on savings accounts and other products. For example, in 2006 the 10 largest banks paid an average 1.87 percent in interest for savings accounts, while the smallest banks paid 4.37 percent. The largest banks are no longer worried about being undercut on price, Wilmarth says.
Online banking has changed the way people handle their finances. They can pay bills online, transfer funds, track payments, and get a more detailed view of their bank account than ever before. Unfortunately, it may not always show the proper balance. With electronic transactions, ATMs, check cards, and direct deposits, banking has gotten more complicated.
ATMs and online bank statements will show deposits available before the money is actually in your account. Using your debit card at a gas station or to reserve a hotel room, for example, can put a hold on funds. Some merchants may be slow to send in charges. And banks can sit on deposits an out-of-state check may take up to five days to clear.
Add to that the constant reordering of debits, and your account balance can quickly become a moving target hard to track accurately day to day. Banks use different algorithms to process payments than what you see online, says Harvard s McGovern. It gives you a false sense of security.