The Perils & Payoffs of Bank Fees

By Newkirk, Kristine M. | Independent Banker, November 1995 | Go to article overview
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The Perils & Payoffs of Bank Fees

Newkirk, Kristine M., Independent Banker

Community banks say upholding the tradition of personalized service is important to preserving their niche as the industry turns its energies toward fee income.

Sales of loans into the secondary market are supplanting interest income, traditionally the primary income source of banks. The resulting decline in net interest margins forces banks to rely more heavily on fee income.

Fees by size

Fee income, broadly defined as non-interest income, is generated from service charges, commissions and fees on a wide range of products, including deposit accounts, ATM use and financial planning. As a percentage of gross income, the nation's smallest banks--those with less than $150 million in assets--had an average of 23 percent of gross income generated from non-interest income through June 30, 1995. By comparison, banks larger than $500 million had non-interest income equaling 47 percent of gross income.

Recent studies have shown that large and out-of-state banks consistently charge higher fees than smaller, locally based banks. One study, conducted by U.S. Public Interest Research Group (PIRG), an organization affiliated with consumer activist Ralph Nader, found that transaction account fees are rising at twice the rate of inflation. Significantly, the report found that small banks charge lower fees than larger banks.

Many banking industry analysts doubt the study's findings. Even PIRG conceded that the study was based on a "worst-case analysis." The study concluded that as more banks consolidate, more consumers could pay higher fees, an argument it offered in calling for additional bank regulation.

The Federal Reserve found, in its 1994 annual report to Congress on bank fees and service charges, that almost no cases of statistically significant increases in the level of fees had been found in the 1993-94 period. Additionally, the report found that, in most cases, the average fees charged by out-of-state banks are higher than those charged by in-state banks. These differences may be due, in part, to differences in the locations and sizes of in-state banks in comparison with out-of-state banks.

But a lingering perception that bank fees are widely rising has consumer activists and liberal members of Congress crying foul. These groups claim that the emphasis on fees is causing "consumer price-gouging." This argument, however, ignores the basic premise of a market-driven economy, which says consumers determine final prices of retail banking services. As the theory goes, no bank can overprice its services without knocking themselves out of contention for customers.

Michael Menzies, president of First Bank of Frederick, Maryland, says his state is a prime example of how out-of-state banks affect fee rates. "Maryland has received particular criticism for exorbitantly high fees," he says. "However, the industry has gone from Maryland based banks to becoming dominated by out-of-state banks, so the perspective of cost in the state is dominated by out-of-state banks."

Flexible banking

Community bank services in Maryland and elsewhere are priced competitively, but a difference in pricing is not found in how the fees are imposed. Smaller banks can adjust their pricing based on a customer's relationship with the bank. Fees may be waived for infrequent offenders or long-time customers. For example, many community banks waive fees for handling bounced checks, deciding instead to advance unsecured credit against a customer's account and hoping the customer covers the check later. Community banks offer this service because they are relationship-driven, rather than product-driven, as are the out-of-state banks.

Gary Weirauch, president of Citizens State Bank of Loyal, Wisconsin, waives NSF fees for infrequent offenders with the understanding that this practice "carries some risk" to the bank. He returns checks only to merchants when an individual has shown gross irresponsibility or a huge overdraft and the customer is not known well.

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