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Less Bank, More Bull

Adam Rust's picture

Posted October 18, 2011

I hope no one forgets why the CARD Act was so explicit about rules against check-order sequencing when they hear the big banks complaining about how hard it is to make money on a retail checking account.

For years, banks settled accounts with a technique designed to stimulate more overdrafts.

Under check-order sequencing, banks reshuffled your payments to make you overdraft. They paid your checks in descending order of check amount. They settled some deposits after withdrawals. They declined to disclose when an ATM withdrawal would result in an overdraft.

The system meant that few of the more naive customers funded the checking account programs. The lion's share of those folks were poor. Overall, four percent of consumers paid more than forty percent of all overdraft fees!

In 2009, Veronica Gutierrez stopped getting mad and started getting even. She filed what would become a class action lawsuit against Wells Fargo. The judge in Gutierrez v. Wells Fargo forced the bank to pay $203 million to class members. His finding - that Wells engaged in 'unfair and decptive practices' - was unequivocal.

Now we hear that the banks believe they cannot make any money without adding new fees for debit cards. Clearly they have income to replace. But when did basic banking become unprofitable? Didn't plenty of bankers drive Cadillacs in the 1970s? Besides, when have banks ever had to pay less in interest on checking than they do now? Isn't the spread on a prime mortgage over a 10-year treasury fairly high by historical standards?

There are problems with the Durbin Amendment. But it seems that this is a big problem. Right now, banks are levying these fees and consumers are fnding few alternatives. You could leave your bank, but then you would probably find that all of your other choices would offer the same fee.

I recently told a Fed committee that I think we are witnessing the withering away of consumer surplus in deposit services. The only question is where it will all end. What clever bank, upon noting that all of its competitors have added fes, will contemplate raising them even more?

I cannot help but think that we are at a turning point. How many more people are about to flee mainstream banks? Maybe the banks will say 'good riddance' but where does that leave the payments system. I think we will see many more unbanked households. You will see it in your community. There will be a few less banks and there will be a lot more check cashers. Employers are not going to appreciate that they have to pay more people in cash. They are going to be frustrated by the cost of updating the direct deposit details for employees that bank through a prepaid card program. Those cards will take direct deposit, but their account holders tend to keep the cards for a time that measures in months and not in years, as the case has been for a traditional bank.