Why You are Charged Hefty Bank Fees

No one likes bank fees. So why do banks charge them, taking the risk of alienating their customers?

The simple answer is that banks aren't not-for-profit businesses, says Sandy McCraren, president of Highland Park Bank and Trust, a community bank in Highland Park, Ill.

"It's not because in banks there is a we-have-to-fee-everybody mentality," McCraren says. "So whereas, we would love to be able to give everything free, we can't. It costs money to deliver those products."

Costs include keeping the lights on and temperature comfortable inside the bank's buildings, providing the hardware and software that make it convenient for customers to move their money, and giving customers the information, answers and attention they need, McCraren says.

"It's as simple as (a customer saying), 'My daughter is studying abroad and lost her debit card. What are we going to do?' and we say, 'Don't worry, we will handle it.' Or it's talking to (a customer) who comes in with a will after someone has passed away and says, 'Help me,'" she says.

Regulatory burden

Institutions also charge bank fees because government regulations have curtailed their other sources of income and raised their costs of compliance, says Carol Kaplan, a spokeswoman for the American Bankers Association, a banking industry group in Washington, D.C.

Examples of recent regulations include the following.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was approved in 2010, hit financial companies with hundreds of complicated new rules and regulations, and some still must be implemented.
The Durbin Amendment to Dodd-Frank capped the fees banks can charge retailers to process debit card purchases.
A Federal Reserve rule allows banks to charge customers overdraft fees for debit card transactions, only if the customer opts in to that service.

"All those new regulations that resulted from the financial crisis have decreased revenue and increased costs," Kaplan says.

In some cases, increased bank fees can mean more services.

For example, Kaplan cites ATMs. The proliferation of ATMs slowed in the mid-1990s, but after fees were introduced, the number of ATMs at retailers, airports, sports arenas and other nonbank locations jumped, she says.

"The fees make ATMs profitable, so there are going to be more of them. If the banks aren't making money on them, they're going to reduce the number because it becomes an expense," she says.

Minimum balances

Kaplan also points out that most people pay little or nothing for banking services. In fact, she says, it's "perfectly reasonable to think that someone can find a bank account that's free."

Even so, some banks waive monthly account fees if the customer maintains a minimum balance or makes a minimum number of direct deposits.

Bankrate's 2012 Checking Survey found the average monthly maintenance fee for a noninterest-bearing checking account rose to a record high $5.48 in 2012, an increase of 25% over 2011. But some banks will waive that fee if account holders average a certain minimum balance, which has been rising in recent years.

According to the 2012 Bankrate survey, you have to keep an average of $723.02 in your account to avoid a monthly fee, up 23% from 2011.

Some banks are pushing required minimums much higher -- in some cases, as high as $5,000, says Eben Jose, an industry research analyst with IBISWorld.

Customers might wonder why some banks waive fees for minimum balances or direct deposits to accounts.

Nessa Feddis, ABA vice president, says minimum account balances enable banks to earn interest from lending activities while direct deposits support higher balances and suggest the customer might be inclined to utilize other banking services.

"Because an account with a higher balance earns a higher return, that account is better able to cover the costs of providing the checking account service," Feddis says. "Similarly, direct deposit means the balances will be maintained to a certain degree and the customer is more likely to use the bank as a primary bank, not just for a checking account, improving the chances that the customer will be profitable."

Banks to blame, too

Big institutions aren't without some blame for bank fees rising. They're also struggling with high costs.

Mike Moebs, CEO of Moebs Services, an economic research firm in Lake Bluff, Ill., told Consumer Reports in February last year that banks with assets of about $50 billion or more have exceeded their optimal level of efficiency. It costs a megabank $350 to $450 to maintain a checking account annually compared to $175 to $240 for community banks and credit unions.

Hidden bank fees

Susan Weinstock, director of Pew's Safe Checking in the Electronic Age Project at The Pew Charitable Trusts center in Washington, D.C., says bank fees should not only be reasonable, but also clearly and openly disclosed.

"The problem with a lot of bank fees is that they're hidden, so consumers don't know until after they've incurred them. If they rely on paper statements, they may not know about a fee they've incurred for weeks until the statement comes in the mail," Weinstock says. "We know from other research we've done that hidden fees can push people out of the banking system."

And that's potentially a loss for the consumer as well as the bank.