I’m not referring to the social contract, although that ground is fertile enough. I mean private contracts that businesses and their customers enter willingly.
I got to thinking about this topic when I read this Associated Press story, posted on AJC.com today, about the demise of free checking accounts. Here’s the first key passage:
Almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services.
It’s happening because a raft of new laws enacted in the past year, including the financial overhaul package, have led to an acute shrinking of revenue for the banks. So they are scraping together money however they can.
In the last year, lawmakers in Washington have passed a range of new laws aimed at protecting bank customers from harsh fees, like the $35 charged to some Bank of America customers who overdrafted their account by buying something small like a Starbucks latte.
These and other fees were extremely lucrative. According to financial services firm Sandler O’Neill, they made up 12 percent of Bank of America’s revenue. On Tuesday, the bank took a $10.4 billion charge to its third-quarter earnings because the new regulations limit fees the bank can collect when retailers accept debit cards.
It’s debatable whether $35 is indeed a “harsh fee” for spending money you don’t have in your account, and less debatable whether it provides sufficient grounds for the federal government to intervene in the market.
But here’s the money quote (pun intended):
“Customers never had free checking accounts,” Bank of America spokeswoman Anne Pace said. “They always paid for it in other ways, sometimes with penalty fees.” (emphasis added)
This goes beyond the truism that there’s no such thing as a free lunch — although that certainly applies in a case where Congress took away a revenue from banks and ignorantly believed that the industry wouldn’t try to make it up elsewhere. (Either that, or members of Congress cynically believed that, with all the popular outrage against bankers, the public wouldn’t connect the dots when they started paying other account fees.)
It was no accident that the typical checking account came to be one in which customers weren’t charged monthly fees to keep the account open but instead paid penalties if they took certain actions, such as overdrawing on their accounts. It happened because banks and their customers settled on that arrangement over a number of years in which millions and millions of separate but similar transactions took place.
We call this process “the market,” even if anti-capitalist propagandists would have you believe that “the market” is some sort of dark art practiced by greedy businessmen.
In any case, the market decided that overdraft fees and other penalties were preferable to monthly charges. We can see that this was the overwhelming sentiment from the statistic, reported in the AP story, that last year “81.5 percent of U.S. banking customers had free checking.”
We can also see that other arrangements were available — again, the market at work — since 18.5 percent of customers did not have free checking.
And we can furthermore see that customers were not at the mercy of the big, bad bankers:
Bank of America CEO Brian Moynihan acknowledged in a conference call that overdraft fees were generating a lot of income. But the bank was also losing customers who were often taken aback by the high hidden fees.
Checking accounts were being closed at an annual rate of 18 percent, he said, and complaints were at an all-time high.
So Moynihan ended overdraft charges on small debit card transactions. He says the rate of account closings have since dropped 27 percent.
Some customers were reacting negatively to the arrangement, and at least one big bank was responding to them. (I’d also take exception to the idea that these fees were always “hidden”; plenty of people like me who read the terms and conditions of their accounts were well aware that such fees existed.)
The case for federal intervention here, then, seems pretty weak. But intervene Washington did — no doubt under much pressure from “consumer watchdog groups,” which in many cases could be renamed Have Your Cake and Eat It Too Societies.
And now guess what: That “free” (i.e., no-monthly-fee) checking account you previously enjoyed is becoming a thing of the past, whether or not that’s what you wanted.
Too bad this was another bill they had to pass so that you could know what was in it.