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Sneaky banks need to be set straight
Commentator Amelia Tyagi
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TEXT OF COMMENTARY
Kai Ryssdal: Just in time for the holiday season, the Federal Reserve announced another crackdown on corporate naughtiness today. The Fed says it wants to start regulating gift cards. And so prevent companies from charging excessive fees if you don't use 'em.
Those extra fees and service charges became commonplace as banks realized exactly how much money they could make off of them. Commentator Amelia Tyagi points out it hasn't always been this way. And it shouldn't be anymore.
AMELIA TYAGI: Picture this: You're checking out at the local diner, when you realize they've charged you an extra $5 for putting ice in your drink. Sounds ridiculous right? Reputable businesses just don't behave that way. But we've gotten accustomed to being mistreated by one industry: the banks.
Once upon a time, banking was a pretty boring business. Banks took deposits, made loans, and people paid them back. Profits were modest but predictable.
And then the industry was deregulated, and all bets were off. No longer did banks make their profits from reasonably priced loans to people who were able to pay. Instead, pre-approved credit card offers flooded the mailbox of every man, woman, and child. Opening a checking account became free, while bounced check fees skyrocketed.
For most banks the real profits now come from late fees, balloon payments, default interest rates, and a host of other tricks and traps. In other words, making a profit has become an exercise in misdirection and misinformation. Sneaky has become the norm.
A new government agency, like the Consumer Financial Protection Agency, now under consideration, could help level the playing field and force banks to be honest with their customers.
Some complain that such a move could impinge the free market. But a free market assumes that customers can comparison shop, and understand what different products truly cost. But how can an average customer read a 30-page credit-card contract, and know which issuer is more likely to trigger a default rate of interest? The marketplace for financial services hasn't been free -- or fair -- for a long time.
There is also some noise that a new protection agency could stifle innovation. But is an over-the-limit fee really an innovation, or just a cheap trick designed to fool customers into believing a product costs one price when the majority of customers actually pay far more?
If banks behaved like decent and honorable businesses, I would be the first to shout out against a new agency. But as long as they continue to sneak in extra charges and hide what they charge for their services, we need someone to set the market straight.
RYSSDAL: Amelia Tyagi wrote with her mother, Elizabeth Warren, an article in the Harvard Business Review that popularized the idea of a Consumer Financial Protection Association.
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The article actually did not go far enough. Banks like Citibank routinely use the slightest excuse to jack up interest rates to "default" rates of 25-30%, the kind of rates that would land any private individual lender in jail for loansharking. This applies to customers who send in payments even slightly late (1 day even), not ones that any reasonable person would consider to be in default.
Additionally, Citibank has recently arbitrarily increased rates for some groups of customers to 29% even though these customers may not have missed *any* payments in the last 12 months. The excuse being bandied is that the bank's "costs of doing business" have increased and these customers are no longer considered profitable at lower interest rates. The reality is that the bank simply doesn't want these customers anymore (probably due to credit risk profile rather than any actual bad payment history by the customer) and is jacking up rates to force the customers into closing their accounts to keep existing repayment terms.
Nice behavior in a lender, eh? I'd be pretty mad at any bank that did that, and reciprocate the bad treatment by never doing business with that bank again for life. I predict there will be a long-term backlash against banks for this bad behavior. Creditworthiness can change, and banks should treat people fairly based on their individual behavior, not some hypothetical risk factor.
Congress sought to protect consumers against banks with the recent credit card legislation that passed, but the banks are lashing out in ways that will alienate consumers even more.
This is a call to return to ethical business. If I gave you a birthday present of a gift card, but then you realized when you used it 10% went back to my account, would you still be my friend? I don't think so! My friend is a community banker. He cares that people make right choices and don't get hurt. He still make a profit. That is RIGHT business. We need companies to remember they are dealing with people, not products.
The premise behind this story is stupid. Let's remember all the government meddling and regulating that got us here, as well as consumers who are too busy, lazy, stupid, ...to read what they are agreeing to then whining when they get busted. BAD STORY. Marketplace can do better.
I believe states are responsible for regulating the finance industry now. Do we really need another federal agency with some type of czar in charge with the power to regulate all financial transactions? This is adding to all the proposed regulations for the health care industry. When and where does it end?
Not another whiney "ooohhh, poor me, those big bad banks are sooooo mean!" story! Please. The fees are all detailed in the account agreement. If you're too lazy to read it...do you really expect sympathy from the rest of us? Personally, I love those fees...because they make it possible for my bank(s) to give me a very high level of service at no cost to me. So to all the people who are paying the fees - Thanks!!! And quit whining.
I'm voting for the "banks are sneaky" conclusion. Can anyone in their right mind conclude that auto-enrolling people in overdraft protection for debit card purchases and burying that fact in 5 point fine print in pages and pages of disclosures is not sneaky?
I'm all for people becoming more informed and responsible, there certainly isn't enough of that around, but even the responsible informed people are getting caught by the banks sneaky tactics.
Very one sided reporting. I don't see sneaky. Everything is detailed in the contract. The government even has rules about how to display the relevant info. Fees only hit certain people, so the costs are limited to them. This saves everyone else for paying for those who break the rules.
Also, fees are ways of influencing behavior. If there were no over the limit fees then everyone would go over. No late fees then everyone would pay late. Or think of it as pay early and get a discount.
Amelia,
Thank you so much for putting into words the thoughts that I am unable to express. You should be on Yahoo Finance.
I quite often add a comment about th need for integrity in banking, insurance and the credit card industry.
Can I look forward to "Sneaky Insurance" and "Sneaky Credit Cards"
Bill Sweet
A better solution would be a better educated customer.
I am very happy with my banks free services and free one month loans (credit cards don't charge interest if you pay it off every month).
In addition, when they have charged me because of some small slip up on my part (happens every 5 years or so), I call up the bank (or credit card company) and they usually remove the fees. They seem to want bend over backwards for my business. If they don't I just switch companies.
If we spent some time in high school teaching kids basic finance and credit card basics, it would be easy for them to avoid all the fees.
All regulations do is teach people dependent on someone else to take care of them. Empower the consumer with KNOWLEGE. Then, you don't have worry about loopholes in your regulation.
Your article is spot on. The number of times my bank has tried to catch me out with little built in fees for the odd bounced cheque or service fees, or wiring fees!
I don't even feel like I can trust banks anymore.
Each time I visit the bank, I feel like I'm about to be fleeced by a conman.
My bank is barely paying out any interest on the reasonable amount of money I've parked with them for the last 10 years (1+% at best!.
Sometime around the financial crisis at the start of the year, they were advertising better rates for new accounts. I enquired if I could open a new account and take advantage of the offer and they replied that it was for new customers only, even though my savings were far greater than their required minimum to start the new account.
Instead they asked me if I wanted to take out a lone with them at a special interest rate of 10%.
Talk about a slap on the face.
I thought about switching banks but none of the other banks seem any better.
It's time policy be put in place to encourage savings. I don't see the point of the US going back to consummer driven growth and if there are no incentives for banks to loan at better interest rates, why should we invest our hard earned savings in them?
At this rate, I am considering parking my money elsewhere, maybe overseas.
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