By James Kwak
From Stacy Mitchell of the New Rules Project, also on the Huffington Post:
This is something I’ve long suspected based on anecdotal evidence. According to Mitchell, it’s nothing new:
“The Fed’s 1999 report, published five months before the Financial Services Modernization Act passed, found that overdraft fees were 41 percent higher at big banks compared to small. Big banks charged more for almost every fee imaginable, including 43 percent more for bounced checks, 57 percent more for stop-payment orders, and 18 percent more for ATM withdrawals.
“But rather than allow the evidence in favor of smaller banks to guide policy, Congress decided to get rid of the evidence. At the urging of then Fed chairman Alan Greenspan, Congress ordered the Federal Reserve to stop publishing its annual report on bank fees. . . .
“But, as it turns out, the firm that the Fed once employed to gather this data, Moebs Services, has continued to survey fees at more than 2,000 financial institutions. Moebs agreed to share its 2009 data with the New Rules Project. As our charts show, the biggest banks still impose much higher costs on their customers than small financial institutions do.
“Not only are fees lower, but several studies have found that smaller banks and credit unions pay higher interest on savings accounts. In a study published by the Federal Reserve Bank of Cleveland, researchers Kwangwoo Park and George Pennacchi examined data from 1998 to 2004 and found that rates on one-year CDs were an average of 14 percent higher at small banks (under $1 billion in assets) than at large ones (assets of $10 billion or more) and rates on interest-bearing savings accounts were 49 percent higher.”
The article discusses some reasons why consumers continue to pay more in fees and get less interest on deposits. I think it’s a combination of better marketing by big banks, a general lack of comparison shopping, and low fee transparency. (Price competition often bigs and ends at the words “free checking.”) Big banks are also somewhat stickier because they can cross-sell more products, which makes them harder to leave. But it can be done.
The Baseline Scenario 
There are supposed to be a number of economists that frequent this blog. Please explain if you would how this is possible, and in keeping with economic principles. Don’t larger banks have more checks overdrafted or NSF’d at any given time than smaller banks? Wouldn’t efficiency and scale dictate that the larger banks would be be more adept at handling these events, and should by all rights be able to do it less expensively based on the volume?
What this graph really shows is yet another illustration of the unsustainable business model of the TBTF banks. Notwithstanding their exhorbitantly higher fees, they still fail, and still lose money.
So greedy is greedy. What else is new?
This says a big part of the problem is not only the greedy bankers but also the stupid people who use them.
Neither seem to give a $hit about the long term viability of our economy or our country.
Why in the world aren’t these people using credit unions? Are there still places where the regulations are so strict that a lot of people can’t join them?
I’d be curious to hear the reasons these people have for doing business with any bank, let alone the behemoths.
you’re assuming that the clients of banks (as in all the people) are rational and make deliberate choices, after comparing products and prices and small print. Why don’t we come to the grips with the fact that people are not rational and they don’t take decisions in their best interest?
how many of you actually know how much you pay, on a yearly basis, for you check account? In my experience as product manager for a bank, 80% of clients have no clue how much they pay. And will never have a clue. Why? because banking is not iPhone, or Facebook or (name any ‘cool’ brand here).
And if competition and free market didn’t bring the prices down already, there has to be another way. Regulation anyone? (I’m European, so please, no political arguments)
Wouldn’t efficiency and scale dictate that the larger banks would be be more adept at handling these events, and should by all rights be able to do it less expensively based on the volume?
According to their textbooks and “free market” propaganda they ought to be.
But they never really seek “efficiency”. That’s a Big Lie. They really look at this as a revenue generator. They seek a rent-seeking position and then extract that rent. They grab a strategic position on the river and string a chain across it.
As for why the customer doesn’t more readily notice this and switch to a smaller bank of credit union, I don’t know for sure. James’ theory sounds plausible.
Better marketing, or what Paul Sweezy and Paul Baran in Monopoly Capital called the “sales effort”, has inculcated this typical Ugly American attitude that bigger is better, and something that has a big brand name must be good, when in fact the opposite is almost always the case.
I forgot to add that if nothing else the fact that people still patronize the big banks in such droves is yet another disproof of the Big Lie of the “rational” market actor.
James you argue that ” I think it’s a combination of better marketing by big banks, a general lack of comparison shopping, and low fee transparency.”. It is surely much more a question of their greater pricing power, as well as the general inertia that pervades the public when it comes to shifting accounts around. This IS slowly changing as web comparison sites open up the offerings in rates, insurance premia and so on. It is well-known that often the same product from the same provider is offered directly at one price and then at a quite differnt one when a search is undertaken. The objective in having a proper Consumer Watchdog (with hopefully real teeth) is that it should curb gouging by major banks and if increasing use of comparison sites continues, customers can and MUST vote with their feet (or wallet). Economic concentration in the “post crisis” situation is very marked in both the US & UK for example. Intervention by the State in markets, often regarded as a no-no, dates back to the years of bad economic micro-management, so beloved by European Governments: this time there is a real need to break up what is oligopoly pricing. You want a healthy banking system but that requires much more competition and decent consumer protection to correct the asymmetries of mega bank vs ordinary consumer.
Well we know why the bankers don’t. The puzzle is the chest-beating, SUV-driving, cheeseburger-eating, buy-it-all-on-credit, “PROUD TUH BE ‘MURICAN!” middle class schlubs that can’t just leave to their 7th home in Aruba on a whim. They will tell you all day long how much they love this country, but when you tell them their lifestyle is killing it, they start asking you why YOU hate American and the “American lifestyle”.
It puzzles and saddens me. Cutting of their nose to spite their face.
Bounced checks were $15 at small banks in 1994. Fees have increased at about the same pace as tuition.
There are a couple other factors. People like having branches more readily available. What I consider a ‘small’ bank, with ~1B in assets actually qualifies as ‘large’ here, but has no branches near my house, but one by my office.
There are other stickiness issues. A big bank may pay to have exclusivity for the ATM’s on a large college campus. Get someone’s account early. You’re more likely to keep it then to get it in the future.
Also, banks grow by acquisition, so you may have been banking at a small or medium size bank, but after being gobbled is now a part of a big bank (it’s always gobbled by a relatively bigger bank, but often an actual biggie.)
Less than $100M in assets is really holding 500 median mortgages. Let’s say you were buying a $500k house, would you really want your loan to be 0.5% of a bank’s assets?
The one technically small bank I found in my general area of NC (http://www.nccob.org/NR/rdonlyres/F20DD6CB-F963-45DE-8F44-EE818FF4599D/0/09Q3asst_dep.pdf)
has two branches, the nearest to my office is 7mi, nearly 2x as far as the ‘big’ ~1B bank mentioned above.
The delineation is a poor one, I think. You should break it down by the giant-4, the big regionals who have in the hundreds of billions in assets, then maybe a ~10B-50B category, ~1B-10B, and then smalls. The other point is how deposit bases set up TBTF status, and a ~100B bank presents much different problems than a ~1T bank – WaMu was dealt with fairly orderly, but we almost merged Citi and Wachovia.
Has anyone considered that perhaps this fee issue is considered trivial by consumers who have enough large problems without canvassing the county for a credit union in order to save $100 a year?
It’s all about the rents!
You don’t have to “canvass the country,” jake. Just go local. Bank with your neighbors. At least if they’re thieves, everybody knows it.
This *is* consistent with rational market actors. I bank at a large bank because they have a huge ATM network. That makes my life very easy when I’m on business trips. Yes, they charge higher fees, but that’s fine with me because of the value that I derive from their network.
I’ve long suspected the same. My local credit union gives me great service and decent rates. Since I have a Visa card through them, I have nation-wide access to my account. I really don’t see what a large bank could offer me to entice me to give them my business.
My ATM card (used against a savings account) is with a small regional Bank in Upstate NY only and I, too, have travelled all over the world for a living. I have no problems using their ATM Card anywhere I go that accepts any ATM Card at all.
My checking account (and credit card) is with a regional Credit Union with approx 20 locations and I very rarely have a problem cashing checks anywhere in the world. I have cashed a few of their/my checks in Kuwait, Germany, Costa Rica, Ireland, etc. with no problems.
As a traveller I have no issues whatsoever with using small regional Banks and Credit Unions, but would have serious costs that I don’t have now if I used any of the Ponzi-schemeing Too-Big-To-Fails.
“Less than $100M in assets is really holding 500 median mortgages. Let’s say you were buying a $500k house, would you really want your loan to be 0.5% of a bank’s assets?”
Really, why do I care? If the bank goes under, do I lose my house? And it’s probably sold the mortgage anyway.
Also, the availability of branches is not as big a deal anymore. I’ve only gone into our credit union once in the last 3 years, and that was to cash some savings bonds. Everything else is electronic or mailed.
The big banks charge fees for services that I don’t use. I never over draw my account, and I’ve only stopped payment on one check in thirty years. Yes, I could bank at a small bank and then pay fees every time I need to withdraw money while traveling. But that makes no sense for me because I travel about 50 weeks/year.