Millions of Americans blame the financial crisis entirely on big Wall Street banks. Raising their ire even more is the fact that many of those banks got huge bailouts at the government's expense, often while rank-and-file taxpayers struggled to make ends meet or got kicked out of their own homes.
The least banks could do, at least as many people see it, is to treat their customers well. But a recent study from the Pew Charitable Trusts shows that with their most basic product, the checking account, banks still fail to give account holders the information they need in a clear and readily available way.
Why it matters
Nine out of 10 Americans use a checking account, which by itself makes it a key component of nearly everyone's personal finances. Not only do checking accounts make it easier for people to save and manage their money, but they also form the foundation for other key components of your financial life, including building a credit history.
But as the Pew report reveals, banks don't do everything they can to make the way they provide those accounts clear. In particular, the study made the following findings:
- Account disclosures are far too long, and most banks don't provide information in a concise, simple format that allows easy comparisons among different institutions.
- Specifically with respect to overdrafts, banks don't always provide information about all the options that account holders have, including the relevant features and costs associated with each option. In addition, banks have made big increases in overdraft fees nearly across the board, with overdrafts typically costing $35 at banks and $25 at credit unions. And even worse, banks arbitrarily put same-day withdrawals in an order that's most likely to maximize overdraft fees, often without disclosing exactly how they determine the order.
- Banks limit customers' ability to pursue remedies for disputes, with the majority requiring binding arbitration rather than affording the option of a jury trial.
Admittedly, banks don't do everything they could to maximize fees. For instance, the report cites Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), TD Bank (NYSE:TD), and BB&T (NYSE:TFC) as all specifically telling their customers that any deposits for a given day would be posted before withdrawals for the same day are processed. With the availability of online banking, you can often find out about a pending overdraft before it actually happens and then make a last-minute transfer or deposit to avoid any actual overdraft from occurring.
But the report highlights the fact that there aren't established rules for all of these practices, giving banks a lot of latitude to implement fee-increasing policies. Given the hunger that most banks have to try to make up for lost income during the financial crisis, customers should assume that banks will typically choose ways to increase their revenue when laws and regulations allow them to do so.
The one thing you need to remember about banking is that it's a service, and it's only reasonable for banks to want to profit from it. In many ways, the fact that customers have free-checking options available to them at all is a gift, given that certain checking-account transactions incur costs for the bank.
But as recent moves by American Express (NYSE:AXP), Chase, and others toward prepaid cards -- which happen to be subject to less regulation than traditional debit cards -- show, financial institutions will naturally gravitate toward areas that have the most profit potential. As the Pew report concludes, it will likely take additional regulation from the Consumer Financial Protection Bureau or other regulatory agencies to change bank behavior on the checking-account front. And even if it happens, you can expect banks to try to make up for any lost opportunities by targeting other products.