ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, July 28, 1996 TAG: 9607270008
SECTION: BUSINESS PAGE: 1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
Not so many years ago, banks used to hand out toasters and teddy bears to entice consumers to open accounts. Today, bankers are dolling out higher fees and service charges with, surprisingly, the same objective.
Both are signs of the competition among banks and, more lately, between banks and other types of financial service companies such as Merrill Lynch and American Express.
The genesis for the new and higher charges dates from 1980. That's when regulators lifted caps on what banks can charge in interest on loans and pay on deposits.
Deregulation led to competition that, despite conventional wisdom, has led to some higher fees.
When government regulations set the interest rates that banks and thrifts could pay depositors or charge borrowers, their profitable spread between those two rates was assured, said Bert Ely of Ely & Co. Inc., a bank and thrift consulting business in Alexandria. Then, banks competed for depositors by giving away premiums to lure new accounts. And, he said, they "provided services they didn't charge for," such as free checking accounts.
Ely, a former Roanoker, said lifting the limits on interest rates "led to unbundling of banking services." That means each banking service must now stand on its own in calculating costs.
In the past, he said, the system contained a lot of subsidies because people use different services unequally, yet the price was the same. Some people, for instance, use teller services more often or write more checks than average. The new system of direct service charges is "a more honest pricing of banking services [and] ultimately fair, although obviously fees are not popular," Ely said.
But two charges that "grate on people," according to Ely, are based on new banking technology.
One is the increase in fees for bounced checks, which in Western Virginia ranges up to $28 from about $15 just a few years ago. The increase is because banks, he said, now depend on automated handling of checks for efficiency, while checks that bounce back through the system must be dealt with by hand. Like parking fines, Ely said, the fees are set high enough to discourage the behavior.
The second much-hated charge is the new fee - typically a $1 - that many, but not all, banks have imposed on noncustomers who use their automated teller machines. That's in addition to a fee imposed by the user's own bank for using another company's ATM. That new fee, Ely said, is opposed by small banks that do not have their own ATMs. He predicted that Congress will require banks to give notice of the fee, but will reject legislation that would ban it altogether. |n n| Banks also "woke up" to the fact that they had to charge fees to recover their costs, although "some larger banks have gone overboard," said James Adams, chief financial officer of MainStreet BankGroup in Martinsville.
Large banks led the charge to today's hefty service charges and "smaller banks are following," said Vittorio Bonomo, associate professor of finance, insurance and business law at Virginia Tech.
He called the system of paying interest and then charging fees "a very bad thing" for consumers because banks never think of the tax implications. People must pay taxes on their interest yet cannot deduct the charges, Bonomo explained.
Someone in his family, he said, had a $500 savings account that, after earning interest and paying charges, "disappeared on her. ... Small accounts make no sense" unless the depositor is under the age of 18 and therefore exempt from most taxes.
Bonomo said it costs a bank about $1.30 a month to maintain an inactive savings account, yet most banks charge $8 a month if the balance is less than $200 or $300.
Cathy Howdyshell of the Federal Reserve Bank in Richmond said the Fed tracks the costs to banks of servicing various accounts and sets an allowance for use of the cash deposits.
The data, based on surveys of 205 banks, is divided according to the size of the banks. It shows that accounts are costly to banks unless there is an account balance that has the potential to earn the bank money that would offset that cost. The larger both the bank and the deposit, the greater the banks' profit.
For example, regular checking accounts, Howdyshell said, lose $7.88 a month at small banks, but the advantage of having the cash results in a net gain of $5.48. Other results are a loss of $8.40 at middle-size banks with a net gain of $6.59 and, at big banks, a loss of $10.55 with a net gain of $8.75.
Small banks are those with deposits of up to $50 million, middle-size banks are those with deposits of $50 million to $200 million and large banks, the biggest group, are those with deposits of more than $200 million.
Howdyshell said the banks' gains on interest checking are much smaller.
The figures for regular savings accounts were given on annual rather than monthly bases. Small banks have a loss of $162.77 a year with a net gain after cash allowance of $29.71. Midsize banks report a loss of $172.60 with a net gain of $48.66. Large banks have a cost of $217.77 with a net gain of $60.09.
Bonomo said fee income as a percentage of revenue for banks has been increasing for years and this trend is accelerating. The fee structure, he said, tends to favor borrowers who get cheaper rates because banks are looking for loans. "Banks are getting money cheaper and lending cheaper," but he doesn't believe that savers should subsidize borrowers.
Interest income is still the most important source of income to banks. Richmond-based Crestar Bank, for example, reported that it earned $184.5 million in net interest income in the most recent quarter compared to $86 million in fees and charges. The latter figure included $23.2 million from service charges on deposit accounts.
One loan product that is expensive, however, is credit cards. Bonomo said credit-card interest remained high while other rates fell. Banks, he added, did not pass on market rates to small savers or people who borrow through credit cards.
Average revenue to banks from service charges on deposit accounts is rising at about twice the rate of inflation, according to figures compiled by SNL Securities in Charlottesville, which tracks the U.S. banking industry.
Spokesman Steve Tomasi said the average bank earned about $30 million from deposit charges in 1995 compared to about $28 million in 1994, an increase of 6.5 percent.
In the aggregate, he said, banks earned $12.6 billion from service charges last year compared to $11.6 billion in 1994.
Banks, Tomasi said, "charge what they can get away with."
Janice Shields, research director of the U.S. Public Interest Research Group in Washington, D.C., a consumer lobbying group, said its surveys also indicate that bank charges between 1993 and 1995 rose at twice the rate of inflation, which ranged in those years from 2.5 to 2.7 percent.
The annual charge on a typical checking account averages $202, Shields said, while the typical $200 savings account charge was $31 a year. The net cost for the savings account after crediting of interest was $25, she said, so the holder of a small savings account actually loses money by putting it in the bank.
The exception is for minors - those under the age of 18 - who usually get small accounts free at Western Virginia banks, but Shields said California banks are beginning to drop this exemption.
Unless a depositor can maintain a minimum balance, she said, he may not even earn any interest to offset these charges. |n n| Probably the most controversial bank fee is the charge for using automated teller machines. Debate among consumer groups has spread in recent weeks to Congress where several bills are pending that would either ban such fees or require disclosure of the charges to ATM users.
When it comes to ATM fees, Shields said, banks earned $2.2 billion in 1995 on existing fees which are charged by the customer's own bank rather than by the owner of the machine.
If banks owning the ATM also add surcharges, as they are beginning to do, they will earn $2.7 billion. And when it comes to bounced checks, she contended, banks make a 900 percent profit on their charges.
Despite these increases in recent years, Arnold G. Danielson of Danielson Associates in Rockville, Md., said service charges rose most steeply between 1990 and 1993. The only exception is the recent move to impose a fee by the bank owning an ATM machine for a cash advance to a noncustomer.
Danielson, a banking industry consultant, said banks had a lot of deposits and little loan demand during that three-year period. After years of trying to attract deposits, he explained, banks suddenly found they didn't need them any more.
Instead, the banks turned to calculating their actual costs for servicing these accounts, such as posting interest, teller time and mailing statements.
In that period, too, many customers with time to spend on the effort were moving their money from savings to checking accounts every day, just in time to cover checks they had written. Their motive was to earn the maximum amount of interest.
Banks reacted with a service charge on small savings accounts - and a charge for each withdrawal from a savings account over a preset number each month.
Danielson said free checking disappeared in that climate, but he advises his small-bank clients to "take that edge" in the competition with larger banks. Indeed, free checking in Western Virginia is also limited to smaller banks such as Bank of Fincastle, Salem Bank & Trust, Southwest Virginia Savings Bank, Virginia First Savings Bank, First National of Christiansburg and Blue Ridge Bank at Floyd.
Despite these offers, Danielson said, surveys show that 80 percent of depositors choose the most convenient bank while only 20 percent use "the [community] bank they love." That means big banks with the convenience of multiple branches can justify imposing fees to cover their costs.
Now, Danielson said, big banks will impose a fee structure to push customers to use telephones, ATMs and computers instead of waiting in line for a teller.
Both Central Fidelity Bank and NationsBank are preparing to offer discounts to customers who use the phone, ATMs and computers but who avoid coming into a branch.
"As an industry, we are looking for ways to go to less expensive service options," said Central Fidelity Bank spokeswoman Susan Lawrence Mistr. "We are looking to reward customers who use [less expensive] electronic options."
At NationsBank, Regional Executive Officer Douglas Waters also said it has a plan to offer discounts to customers who agree not to use a teller. He differentiated this plan from one at First Chicago Corp. that set penalties, rather than incentives, for customers to stay away from tellers.
Branch offices will still exist in the future, he said, but younger customers actually prefer electronic means of contacting the bank.
Charles Meiburg, professor of business administration at the Darden Graduate School of Business at the University of Virginia, said some of the changes have benefited consumers. He pointed out that interest checking is a relatively new wrinkle. Banks never used to pay interest on demand deposits.
As to bounced checks, Meiburg said, a check returning through the banking system is expensive so the charge is designed to to be punitive. Depositors, he said, ought to keep track of their balances.
Banks will keep on charging, he said. "I don't see anything on the horizon to change it" because "they've got to cover the costs somehow."
But he said banks are not gouging. "If they did, a new institution would come and steal their customers. Competition is protecting the consumer."
In the past, he said, heavy charges on commercial accounts subsidized the consumer the way long-distance telephone fees once subsidized local phone calls. "But no more." |n n| Banks themselves say they are only charging to recover their costs, even as the business of banking broadens and changes dramatically to include other types of financial services.
Sean Fox, manager of investor relations for First Union Corp. of Charlotte, N.C., where fee income rose 25 percent in the second quarter, said his bank earns most of its fees from commissions selling nontraditional products such as mutual funds and annuities.
First Union also earns money managing clients' money with $15 billion in assets currently under bank management.
He said First Union aims to be two-thirds a traditional bank and one-third a securities firm. First Union sold annuities worth $166 million last year and $279 million just in the last quarter. Mutual fund sales in the last quarter reached $1.7 billion.
Other fee income is generated by First Union's Capital Management Group, which places business financing in the money markets. Fox said the group earned fees of $80 million in the last quarter.
Fox said banks today provide services, such as 24-hour telephone customer service and ATMs, that didn't exist years ago. Customers get free use of the phones. People with $200 in a savings account get two free uses of the ATM a month, but a savings balance of $2,500 or a checking account is needed for unlimited ATM access.
First Union gets $2 when a customer accesses a First Union account from another bank's ATM and, now, $1 when a noncustomer uses one of its machines. Customers pay nothing for using the bank's own machines.
First Union spent a lot of money installing those machines and should not subsidize customers of other banks, Fox said.
In addition, he said, studies show that 70 percent of First Union customers avoid all charges for ATMs and for accounts by keeping the minimum deposits in the bank.
A spokeswoman for NationsBank said 75 percent of its checking customers and 85 percent of savings account owners in the Mid-Atlantic region avoid the fees.
The only other banker who would estimate the number of people avoiding all service charges was Adams of MainStreet. His "rough guess" was 40 percent to 55 percent.
First Virginia Bank charges 25 cents for customers who withdraw money, but Richard Bowman, chief financial officer, said that fee is waived in most cases because customers either maintain a sufficient balance or maintain several accounts.
He said First Virginia instituted the charge, the only one in the Roanoke Valley, because an ATM machine costs a lot of money. Some banks, he said, are beginning to charge annual fees for ATM access cards whether or not customers use the machines. First Virginia's method, he said, charges those people who use the service.
Bowman said First Virginia's fees on all accounts and services are reviewed every year. All increases, he said, are "consistent with inflation."
Valley Bank is a small new bank, but it too imposes fees. Executive Vice President A. Wayne Lewis said the bank has to recover its costs.
Like virtually all banks, it offers free checking to older citizens. It also has introductory free checking for the first 16 months.
But Lewis said that "relationship is really the key." He said outside groups who protest charges don't realize that they are waived when people form a relationship with several different accounts.
Customer who have a home equity line, for example, also get free checking, discounts on loans and fee waivers. Customers using multiple services, Lewis said, "are your most valuable customers and you do the most for them."
At Central Fidelity, Mistr said about 40 percent of customer accounts are unprofitable because of low balances. Rather than expect other customers to subsidize them, she said, those who cost the money should pay the freight.
What the bank tries to do, he said, is to tailor different types of accounts to various customer needs. For instance, said NationsBank's Waters, savings customers are not charged the listed fee if they make regular deposits of any size every month.
Meanwhile, Bonomo, the Virginia Tech professor, said customers bear some responsibility for rising fees because they "sort of give up." They go to the most convenient bank, not the one paying the best rates.
As consumers, he said, people need to be more "sensitive" and go after a better interest rate. It's up to customers, Bonomo said, to punish those banks whose rates and charges penalize the customer and to reward those banks with favorable terms.
LENGTH: Long : 274 lines ILLUSTRATION: PHOTO: GENE DALTON/Staff. Virginia Tech professor Vittorioby CNBBonomo says consumers need to be more "sensitive" and go after a
better interest rate. It's up to customers, he says, to punish those
banks whose rates and charges penalize the
customer and to reward those banks with favorable terms. color.
(headshots) 2. Ely. 3. Adams (color). Graphic: Chart by staff:
Banking charges. color. KEYWORDS: MGR