When I arrived at college and opened my first non-credit union account with a big national bank, I was hit with a rude awakening. The monthly service fee quickly whittled away at what little spending money I was able to save up each month. As soon as my credit union from back home offered E-deposit via smartphone, I closed my account with the national bank and never looked back.
I was surprised to learn recently that fees and commissions (in all the various forms they may take) are an integral part of the business models of commercial banks, they can account for upwards of 20% of net revenues. As a potential customer, I am weary of bank fees and their effect on my personal bottom line. As a potential investor, I view a bank with a good fee structure as a good possible investment. Why? It is easy money for the bank; they get paid for the privilege of using your money to make themselves more money.
Dude, where's my fee?
Banks generate fees from providing services like mortgage banking, asset management, and investment banking. Depositors also pay fees for things like of cashier's checks, wire transfers, credit card applications, and monthly maintenance charges on accounts. Finally, the bank can impose penalty fees for things like overdrafts, excessive activity, inactivity, lost cards, or missed payments. It's all there in the fine print.
To illustrate, below is a chart plotting some common fees associated with the most basic checking accounts offered by Bank of America (BAC +1.11%), Citigroup (C +0.91%), Wells Fargo (WFC +1.44%), and JPMorgan Chase (JPM +1.09%). The monthly service fee can be avoided by maintaining a $1,500 average daily balance or a minimum monthly direct deposit amount. With some sacrifice in convenience and careful planning, these other fees are avoidable, too; however, as an, uh, low-income college student, that is often easier said than done.
|
Bank Fees-Basic Checking |
BAC |
C |
WFC |
JPM |
|---|---|---|---|---|
|
Monthly Service Fee |
$12.00 |
$10.00 |
$9.00 |
$12.00 |
|
Non-Branch ATM Withdrawal |
$2.00 |
$2.00 |
$2.50 |
$2.00 |
|
Overdraft* |
$35.00 |
$34.00 |
$35.00 |
$34.00 |
|
Stop Payment* |
$30.00 |
$30.00 |
$31.00 |
$30.00 |
*Prices vary slightly from state to state.
The card cash cow
A huge contributor to fee related income comes from credit cards. Fees for things such as the application to get the card, annual service charges, late payments, balance transfers, and cash advances all add up to contribute significantly to a bank's bottom line. It is difficult to compare these fees across different banks because often, they are only expressly written in the fine print of the terms of the credit card or bank account. For this reason, they can also sneak up on unsuspecting consumers who didn't read through the many pages of documents associated with their accounts.
By the numbers, card fees alone are significant contributors to banks' bottom lines. In fiscal 2012, Bank of America earned over $6 billion in "card income," which equates to approximately 7% of net revenue for the year! The story at JPMorgan was similar: $5.7 billion, or almost 6% of net revenue. This is all income derived solely from fees and charges on credit cards or bank cards and not from interest earned.
Takeaway for investors
When it comes to evaluating a bank as a potential investment, it would be prudent to familiarize yourself with its fee structure and determine if it has a history of being able to generate steady income from it. Keep an eye on new legislation in regulating fee disclosure and generation.
Recent changes in interchange fees, or "swipe fees," is a subject that ought to bear further investigation. A federal cap on the amount banks can charge merchants for each use of a debit card may have banks instituting new fees on checking accounts to make up the difference. Watch for how the major banks respond to these changes and the effects they may have on the bottom line going forward.
