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Banks Spit in Savers' Faces Again

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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of America will charge a flat $25 fee regardless of how much someone takes out, plus between 1% and 3% of the amount withdrawn.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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Fool contributor Dan Caplinger thinks banks make plenty without help from higher fees. He doesn't own shares of the companies mentioned in this article. American Express is a Motley Fool Inside Value choice. Southwest Airlines is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo; through a separate account in its Rising Star portfolios the Fool also has a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy saves you from certain doom.


Read/Post Comments (7) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 11, 2011, at 2:19 PM, ScubaStClaire wrote:

    BAC also recently changed the rules for checking account balances. They now charge a monthly $25 fee on a Advantage checking account if your Balance falls below $5000 on any one day. Previously you just had to keep an average of $5000 between checking and savings.

  • Report this Comment On May 11, 2011, at 2:32 PM, chadscards1274 wrote:

    Everyone does understand that CDs are not forced on anyone? This article seems to assume that CDs are broken all the time. The simple solution? Don't place funds in a CD if you are going to need the money to live off of. The other option? - Find a higher (relatively) yielding money market account offered online and eliminate the issue of a penalty if you need the funds. In many cases a high yield money market pays about what you would get from a CD of less then 1-2 years anyway.

  • Report this Comment On May 11, 2011, at 2:40 PM, ETFsRule wrote:

    BOA has cd's that you can break without any penalties. I think the rates are just a bit lower than usual.

  • Report this Comment On May 12, 2011, at 8:22 AM, mhy729 wrote:

    Why tie up your money in CDs? Use a number of online savings accounts like those offered by ING or HSBC and you'll get a comparable return without withdrawal penalties. CDs are pretty much worthless. Factor in the bonuses you can get from making referrals and online savings accounts are definitely the way to go.

  • Report this Comment On May 14, 2011, at 1:18 PM, capitalapprecia8 wrote:

    the big banks and the big investment banks would all go away, if people switched to their local credit unions and vanguard investments, etc.

    BOA, Goldmans Sachs, etc. and the like would literally go out of business, and there wouldnt be anymore b.s. shafting our economy.

    people in those fields would have to get jobs that actually added value to the economy, rather than just redistributing wealth to people in the financial industry.

  • Report this Comment On May 14, 2011, at 1:21 PM, capitalapprecia8 wrote:

    my local conservative credit union would only loan me 375 in 2006, but BOA loaned me 485 after the advice of my real estate agent gave me to get a bigger loan. i defaulted payments and short sold in mid 2010. its just a big boondoggle if i would have stuck with my credit union, i would have a a very modest property, but i could have afforded it in the downturn.

  • Report this Comment On May 14, 2011, at 1:24 PM, capitalapprecia8 wrote:

    im never involving myself with a national bank again in my life and i will never associate with a big broker either. only 10$ or less per trade, or Im out of there. and any calls i get for advice from commisioned salespeople or employees at a company that benefits if i make a trade, i hang up the phone and do not return phone calls.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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