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| In this Jan. 31, 2011 photo, Bank of America customers use ATM machines in New York. The third quarter earnings that banks have reported, Tuesday, Oct. 18, 2011, show that they are struggling to make money the old fashioned way, by lending to consumers and businesses, when interest rates are at historic lows. New rules have stunted the banks' ability to collect certain kinds of fees like checking account overdrafts and late credit card payments, so they're making up for it with new charges like Bank of America's $5 monthly fee for using debit cards, which ignited a public firestorm that reached all the way to the White House. |
The latest third-quarter earnings reports from this week confirm that banks are struggling to make money the old-fashioned way, by lending money to consumers and businesses. The main reason: interest rates are at historic lows. That makes it harder for banks to charge high rates on loans.
New rules have also curtailed various kinds of traditional fees, costing banks billions in lost income. These fees include overdraft charges on checking accounts and fees for making late payments on credit cards.
So, many of them are making up the difference with fees that aren't covered by the new rules. Bank of America Corp., which reported results Tuesday, has set off a firestorm over its plan to charge customers $5 a month for using their debit cards. Even President Barack Obama has taken the bank to task.
On Tuesday, Consumers Union became the latest to express outrage. The group urged customers to switch to other banks or credit unions if big banks refuse to drop the fees.
"This debit card fee just adds insult to injury," Norma Garcia, director of Consumers Union's financial services program, said. "It's unfair for the banks to stick consumers with a monthly fee just to use their own money."
Making money in the traditional way is becoming tougher for banks. In an effort to make up lost revenue, banks are rolling out new fees across the board:
- Citi will charge $20 a month starting in December to some customers who don't keep a balance of $15,000 or more in their combined checking, savings and investment accounts or loan balances
- Wells Fargo & Co. started testing a $3 monthly fee for debit cards Friday in New Mexico, Nevada, Oregon, Washington and Georgia
- JPMorgan Chase & Co. tested a $3 monthly debit card fee in February in Wisconsin and Georgia
- SunTrust Banks Inc. of Georgia introduced a $5 debit card fee for customers with basic checking accounts in June, and
- Regions Financial Corp. of Alabama introduced a $4 fee for debit cards in October.
The fees have become a flashpoint of anger and frustration among the growing numbers of anti-Wall Street protestors. They come in the midst of a tough economic climate where millions of people are unemployed. Some say the fees are a callous response by banks that were bailed out during the financial crisis.
On Monday, activists gathered in Burnside Park in downtown Providence, R.I. called on residents to close their accounts at Bank of America. They accused the bank of "immoral" banking practices.
"They're cheating the American people," said Patricia Phelan, 28, of Providence, who closed her two Bank of America accounts. "They're sneaking fees in."
Banks say the latest round of fees was triggered by a new federal law championed by Senator Dick Durbin of Illinois. The law caps the amount banks can charge merchants for debit card usage at about 24 cents per transaction, down from an average of 44 cents.
The rule went into effect Oct. 1 and will whittle down revenue even further starting in the fourth quarter of this year. JPMorgan said it would lose $300 million each quarter in income, Wells Fargo warned it would lose $250 million a quarter.
"It's a significant loss in revenue and income and banks have to recoup that somewhere," said Ron Shevlin, senior analyst at research firm Aite Group.
The results this week also reflect the strain of operating under the new rules in a slowing economic environment. On Tuesday, Bank of America's $6.2 billion earnings in the third quarter came from accounting gains and the sale of a stake in a Chinese bank, but its revenue and income was lower in almost all its business lines - credit cards, real estate and investment banking businesses.
On Monday Wells Fargo said its income from fees and charges plunged 7 percent in the third quarter, largely due to new regulations that limit overdraft fees and make it harder to raise interest rates on credit cards. Citigroup Inc.'s revenue dropped 9 percent from its North American consumer business because of fee curbs from new regulations.
"It's a tough, tough environment to turn a profit," said Paul Miller, bank analyst at FBR Capital Markets.
Nancy Bush, banking analyst at NAB Research, says the fees may have gone too far and are hurting the banks' public image. After all, most large banks have already eliminated free checking accounts and instituted fees for everything from bank statements to using tellers.
"Banks have been bludgeoning their customers in the past year with fee after fee, only adding to a tough environment," said Bush, who is also a contributing editor at SNL Financial. "It's time for banks to reward customers a little bit and send a message that they realize times are tough."
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