Five Secrets Your Bank Doesn't Want You to Know

Laura Rowley Money & Happiness







Five Secrets Your Bank Doesn't Want You to Know


by Laura Rowley









Posted on Wednesday, August 5, 2009, 12:00AM
Banks are squeezing customers with historically high fees and penalties, from overdraft charges to account service fees to new surcharges on foreign debit transactions.

But
the pressures that have prompted the fee war with consumers started
well before the financial meltdown, according to Jo Preuninger, a
former management consultant who spent more than a decade in the
consumer banking arena. I asked Preuninger for a little history, as well as some of the tricks of the trade that banks would prefer to keep secret.

Secret #1: For many banks, the most profitable customers aren't the mass affluent -- they're "Joe Lunchbox."

In
1999, the Gramm-Leach-Bliley Act allowed banks, insurers and securities
firms to merge, breaking down barriers that had been in place since the
1930s. Following the new law, "if you took all the (deposit) checks
written for $10,000 and above, most were written to institutions such
as Charles Schwab, Fidelity or Merrill Lynch," says Preuninger. "They
took the best customers. The banks were becoming more like Laundromats,
where you put money in for a short period because you still needed to
pay with a check or (get cash)."

At the same time, loans
provided little profit as interest rates remained relatively low,
prompting banks to seek consistent, non-interest income. "The focus was
on how banks could not only identify fees they could charge, it was how
to do a better job of collecting their fees," says Preuninger.

Middle-income
customers presented the greatest potential to harvest fees. "There's
certainly a customer segment that could be called 'Joe Lunchbox,' who
expect to be nickeled and dimed," says Preuninger. "They are managing
money from paycheck to paycheck. It's someone who would prefer to pay
an overdraft fee to get their mortgage covered rather than get hit by a
mortgage provider with a late fee and a ding on their credit score."

Last
year, overdraft and insufficient-funds charges totaled nearly $35
billion and comprised about 90 percent of banks' consumer-fee income,
according to a study
by the consulting firm Bretton Woods Inc. Three-quarters of banks
automatically enroll consumers in their "overdraft protection" programs
without formal permission, and more than half of banks manipulate the order in which checks are cleared to trigger multiple overdraft fees, according to a Federal Deposit Insurance Corporation study.

"They
are going to try to turn the best profit they can, which is why they
post in the most attractive way they can while avoiding and minimizing
legal exposure," says Preuninger. Someone who overdraws a
checking account a few times a year should choose a bank with a program
that makes it easy (and free) to shift funds from savings to checking
to protect against overdrafts.
Secret #2: Banks hope frequent overdraft customers don't understand the alternatives.

The banks deemed overdraft protection to be a customer service convenience that provides an alternative to payday lenders,
says Preuninger. And yet some of those customers might almost fare
better with loan sharks. The Bretton Woods study found 80 percent of
overdraft fees are incurred by 20 million households, who paid an
average of $1,374 in overdraft fees.These customers should consider ditching traditional checking account in favor of a prepaid debit card,
which typically cost $70 to $80 a year ($10 upfront with a $5 monthly
fee). Users direct-deposit their paychecks onto the cards (the money is
FDIC-insured) and can do point-of-sale transactions and pay bills
online. There are no overdraft fees; the purchase is declined if the
card is empty.

Secret #3: Those helpful new customer
set-up kits, designed to make it easy to switch banks, also try to make
the account "sticky."

"I did a lot of work in customer
attraction and retention," says Preuninger. "The biggest barrier to new
accounts was switching. There's a higher tolerance; a bank may have a
lot of long-term customers -- that doesn't mean they love (the
service)."

Most banks have a kit to assist customers in
switching services. But do it yourself instead. Enter your regular
bills in the bank's online billpay site, rather than signing up with
each biller's website. If your new banking relationship goes sour, the
account is more transportable. You won't have to log into a dozen
different biller sites and change the account and routing numbers.

Secret #4: Long-term relationships matter.

"Know
what you want in the way of a bank and stay as long as you can because
tenure does matter," Preuninger says. "If you've been with a bank three
to five years, they treat you differently than if you are there six
months. If you direct-deposit your paycheck and have a (savings)
relationship, they think of you differently than if you have free
checking with $100 in it. Tenure and relationship does matter."

So
if you incur the rare fee now and then, always call customer service
and ask (politely) for it to be removed. Emphasize your long-term
relationship with the bank and ask for a supervisor if the initial
effort fails.

Most customers aren't profitable until they've
been with a bank a few years because of the high cost of customer
acquisition -- sales compensation to branch managers, IT
infrastructure, documentation and account setup. "It's a long time
before they break even, especially if they goose it with $100 to you to
open the account," Preuninger says.

Secret #5: Banks
want you to enjoy the "advantages" of paying with credit, debit, check
and cash -- because it will make you more likely to lose track of your
money.

"One of most dangerous things going on with
consumers is they are not paying attention to the variety of ways they
are paying. They are balancing money back and forth because it's too
hard to account for," Preuninger says. "If you pay seven different
ways, you've just added complexity to your life. Consumers shouldn't
say to the bank ‘you're responsible to tell me what I'm doing with my
money.'"

But more banks are moving in that direction. PNC Bank,
for instance, launched an account called Virtual Wallet that presents
account information in calendar form, focused between today and the
account holder's next payday. A "danger day" appears on the calendar in
red if the account is at risk of an overdraft. The user can either move
bills later in the month, or shift money immediately from the savings
portion of the account at no charge (the account does it automatically
if the consumer doesn't). Statements are only available online and the
bank charges 50 cents per check for writing more than three a month.

Best
bet? Simplify. Get a free checking account with no fees and a low
minimum balance requirement, pay major household bills online, and then
stick to cash. You'll think twice about purchases, and avoid getting
caught in the widening web of bank fees.