November 7, 2011
Banking Fees and "the Market"
We often hear that the "market works" (and I happen to believe that, at least most of the time), but I think we often forget what that means. I've been thinking about this a lot in connection with some of the proposed bank fees, like those from Bank of America and other banks that have gotten a lot of press lately.
I have tried to bank with my college credit union and other small banks as I have moved around the country, and my current bank was a savings and loan that survived that crisis in the 1980s. They don't charge crazy fees, and they even reimburse all ATM fees from any bank when I use other machines. So I'm loyal to my small bank, and it's why I switched to them from my large bank when we moved here.
As Erik Gerding notes here, the idea that smaller banks or credit unions treat their customers better is not new. Ryan Bubb (NYU Law) and Alex Kaufman (Board of Governors of the Federal Reserve System (FRB)) have a paper that suggests credit unions do treat their customers better. At a presentation of the paper, Professor Gerding explains:
One of the questions I had then was why credit unions can't win customers by sending a credible signal that, to put it colloquially, "we'll screw you less." This Bank of America episode provides an interesting answer that perhaps customers are starting to recognize hidden fees and market choices.
My question is why people tolerate annoying banking practices at all. If literally all banks start charging high fees for debit cards and other transactions, of course there is no value in switching, and there is not consumer choice. But that has hardly been the case. There are options for smaller banks that provide many of the same services as big banks, often at better rates. Yet people have been reluctant to change in any significant way, at least until November 5th's Dump Your Bank Day.
Ultimately, the reason banks have continued to impose fees that seem like they would make people mad is because the banks have largely gotten away with it. It's one thing for people to complain about high fees. It's quite another for people to go to the trouble to change their direct deposit, automatic bill pay, and other banking services. When you push too far, though, the market will tell you, as Bank of America seems to be learning. Until then, the market doesn't really care, and that's why banks, cable companies, wireless companies, etc., act like they do: either we really do not have a choice or we don't really care that much (and the truth is, on a large scale, it's usually the latter). Even where choice is limited (like my cable tv market), we often fail to make choices when we can. And I have 48 movie channels I don't really need or want to prove it.
The explanation lies in switching costs, the power of branding and advertising, and most of all the way this played out historically. Namely, there was until recently the general understanding that banks were utility-like, quasi-governmental (with deposit insurance and access to the Fed), highly-regulated entities operating at least to some extent in the public's and their customers' interests. Clinton, Bush and Obama did away with that, and the public is just now waking up to it.
Posted by: James | Nov 8, 2011 1:16:07 PM