fresh voices from the front lines of change







A lot of CNBC anchors do not seem to understand how regulation works. In fact, it seems like the network’s anchors don’t really get how competition works. If you’ve tuned into the business channel this summer, chances are you’ve heard its anchors pushing the ridiculous bank lobbyist mantra that new consumer protections will actually make life harder for consumers. It’s simply not true. Wall Street reforms aimed at credit card billing practices and overdraft fees are already protecting the pocketbooks of ordinary citizens all over the country.

Bankers don’t like consumer protections for a reason: they’ve been able to make a lot of money in recent years by gouging consumers and tricking them into paying absurd fees. So financiers have dispatched CEOs and lobbyists to CNBC to make the case that their predatory profits are actually good for consumers. Here’s how the perverse argument goes: If you force banks to stop abusing some of their customers, banks have to make their money by charging higher prices to all of their customers. The argument flies in the face of basic facts about how markets work, but even if it was essentially true, the banker dystopia looks much better for consumers than the past decade’s status quo.

For an example, take a look at Maria Bartiromo’s obsequious July 22 interview with BB&T CEO Kelly King (who personally took home over $5 million last year, with the economy in the doldrums). You can also find Wells Fargo CFO Howard Atkins making a similar case on July 21, and megabank lobbyist Steve Bartlett pushing the agenda on July 20 (to CNBC’s credit, the anchors push back a bit against Bartlett late in the interview). From Bartiromo’s King interview:

MB: So many people have said the fee business is a profitable and a substantial one for so many banks, whether it’s overdraft fees or any other fees. And if we have rules that they won’t be able to charge that, they’re going to find some other place to put those fees.

KK: Well that’s right. You know Maria, we have to cover our costs . . . we simply have to find a way to recover our costs, which ultimately means that there will be increased charges to the consumer.

There’s a glaring hole in this argument. Whatever their costs, banks still have to compete with each other on pricing. If new regulations force banks to stop charging deceptive, hidden fees, banks can’t just automatically move those fees elsewhere and expect to score the same profits. They may be able to jack up their prices temporarily, but pretty soon they’ll have to come down as banks try to win over new customers. This is what Credit Suisse analyst Moshe Orenbuch means when he says he expects profits to be “competed away.”

Hidden fees are much more profitable than up-front fees, because the normal market rules of competition don’t apply when customers don’t know they’re being charged. They’ll rack up tremendous fees that they would never intentionally accumulate. When you place those fees up-front in the form of higher interest rates, suddenly people don’t want to pay them anymore, and demand lower rates. This is why banks are complaining about the rules—they wouldn’t care about new consumer protections if they truly had no impact on their profits (and by extension, bonuses).

This is basically what has been happening with credit card interest rates since the enactment of new credit card reforms in 2009. Interest rates have been barely effected by the law.

That doesn’t mean that the rates aren’t going up—the average credit care interest rate has moved from about 13 percent in June 2009 to about 14.5 percent this summer. If free and fair markets cost 11 percent more than unfair and deceptive markets, count me in for fairness. But even that modest increase is not a function of enhanced consumer protections—it’s a function of record-high default rates on credit cards. Banks are taking huge losses from the recession as consumers fail to pay off their credit card debt. That really does drive prices higher. But it’s a “cost” that has nothing to do with consumer protection.

The millionaires on CNBC are primarily worried about overdraft fees, since many of the most egregious credit card abuses were outlawed by Congress in April 2009. The banking industry raked in a monstrous $38.5 billion in overdrafts last year, far in excess of the industry’s total combined profit of just $12 billion. Without overdrafts, many banks would have been taking losses, not profits, and a lot of big bonuses wouldn’t have been paid.

Did banks really have $38.5 billion in checking account costs in 2009? Of course not. After all, with costs so high, how ever did banks get by with the paltry $23.7 billion in overdraft income they scored in 2008? What really matters to banks on checking is not cost, but potential profit. That’s why a lot of banks will actually pay interest on checking account balances—the more money you keep in your checking account, the more money banks have to lend out profitably. For the middle class and the wealthy, new overdraft rules aren’t going to affect checking accounts at all, since those accounts aren’t costing banks anything—they’re making them money.

This potential profit isn’t quite as compelling for the checking accounts of low-income people, since those accounts by definition do not have much money in them for banks to lend out. But that doesn’t mean that every overdraft trick deployed in 2009 was a necessary charge. Indeed, banks have been devising more and more tricks to rake in overdraft income over the past decade, even going so far as to backdate checking purchases without consumer consent in order to charge more overdraft fees. Abuses like that are not a necessary component of any checking business. Ending those outrages will simply mean less money for banks, it will not mean more up-front charges for consumers.

Banks do not need to charge new fees to “make up” for the lost revenue from tricks and traps. But that doesn’t mean banks won’t try to jack up your interest rate or sneak new fees into your checking account. Banks will do just about anything that makes them money if they think they can get away with it. BB&T, for instance used to charge its customers a $10 “service fee” for the courtesy of mailing out monthly statements. The bank didn’t tell its customers it was doing this, it just included a one-line charge on each monthly statements, hoping that customers wouldn’t catch the item and complain. BB&T didn’t start charging this fee because it needed to help poor people or fend off some new regulation, it just saw the opportunity to score an easy buck, and went for it.

You may very well find some unpleasant new fee in a banking statement this year. But it will have nothing to do with new consumer protections, regardless of what CNBC anchors tell you.

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