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Ever since the financial crisis, banks have had to face an uncomfortable truth: With public opinion against them, they nevertheless need to take steps to shore up their revenue. Although some of the actions they've taken may work in the short run, what banks are doing will eventually result in a huge customer revolt that could threaten their very existence.
It seems like every month, you find a new fee that banks are imposing on their customers. Whether it's the clampdown on free checking that Wells Fargo (NYSE: WFC ) and Fifth Third Bancorp (Nasdaq: FITB ) implemented last year or annual fees for certain credit cards from Capital One (NYSE: COF ) and American Express (NYSE: AXP ) , big banks are doing their best to make up the revenue lost from credit card and debit card legislation over the past few years.
The latest fee
Unfortunately, the latest bank attempt to raise revenue hits people who are least able to absorb additional costs: CD investors. For years, bank customers have had to accept rock-bottom rates on certificates of deposit, which involve savers tying up their money with a bank for a set period of time.
The new fee targets those who withdraw money from their CDs early. Traditionally, the early withdrawal penalty has been tied to the amount of interest an accountholder receives. For instance, someone tapping into a CD early might have had to give up anywhere from three months' to a year's worth of interest as an early withdrawal penalty.
But with rates so low, banks found themselves hoist with their own petard. Since penalties for early withdrawal were based on interest, banks that paid almost no interest gave savers very little incentive not to break CDs early. That in turn encouraged savers to take on long-term CDs that paid somewhat higher rates, safe in the knowledge that they could also take out money early and often still end up ahead.
It'll cost you
Now, both Bank of America (NYSE: BAC ) and JPMorgan Chase (NYSE: JPM ) have made changes to their early withdrawal penalty policies to make sure that customers pay a real penalty no matter how low their interest rates may be. Bank of America will charge a flat $25 fee regardless of how much someone takes out, plus between 1% and 3% of the amount withdrawn. Chase has a similar $25 plus 3% charge.
Now granted, the fees do make some sense. When interest-based penalties aren't enough to deter savers from breaking their CDs, banks have to raise fees to restore the incentive for savers to stick with the CD's original terms and to cover their own costs.
But at some point, fees will hit the breaking point for banks. Opponents are pointing to the fact that the new fees result in 1,600% to 1,700% increases. It's as if banks had taken a lesson from annuity providers like American Equity Investment (NYSE: AEL ) , which earned more than half its net income in 2009 from surrender charges -- the annuity equivalent of early withdrawal fees.
When will customers finally rebel? According to research at the Wharton School of Business, the key is to keep customers convinced that fees are reasonable. Small fees that are tied to actual costs have a better chance at gaining acceptance than the blanket approach that many banks are taking. Just as Southwest Airlines has gained in reputation from spurning baggage fees, so too will innovative banks eventually put the big banks at a big disadvantage by giving customers what they want.
Don't put up with it
As a saver, when you open a CD, make sure you understand its terms. If the fees they impose are too onerous, the solution is easy: find another bank. In the long run, banks that overreach for short-term profit relief through fee income are going to get a nasty surprise from smart savers who are mad as hell and won't take it anymore.
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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.