Raise your hand if you’re fed up with big bank fees. These pesky fees can put a damper on your day and a drain on your finances.
According to a 2016 survey by the Pew Charitable Trust, a full quarter of people who use bank overdraft services regularly end up paying out at least one week’s worth of wages annually. Moreover, most of these same people earned less than $25,000 per year. In other words, the people who can least afford these fees are the ones shelling out the dough!
So, why do big banks charge fees? It turns out to be a sordid tale of technology, greed, and good intentions gone wrong.
Back in the Olden Days….
Banks used to be restricted solely to brick-and-mortar buildings. No one knew what the Internet would bring.
These banks were—and still are—costly to operate. Among these costs, banks pay for bank tellers, rent, utilities, and all the expensive little things that go along with running a physical building. To recoup these costs and earn a profit, banks have two options: charge account fees or charge interest on loans.
Banks began charging more fees in tricky ways. For example, if you opened a new account at a bank, you’d often be automatically enrolled in an overdraft service. And, if you overdraw on your account, the bank would “kindly” pay the charge for you. Once this charge was debited from your account, you could be left with a negative balance and a hefty fee to boot.
Banks and other lenders also began loosening their lending standards. In the years after the Y2K scare, it suddenly became a lot easier to get a mortgage. This contributed to the financial crisis in 2008. In the aftermath, many banks began regularly charging fees.
The Dodd-Frank Wall Street Reform and Consumer Protection Act…and You
This long-winded act (commonly referred to as just Dodd-Frank) was passed in 2010 to try to prevent the financial crisis of 2008 from happening again. This act established the Consumer Financial Protection Bureau and ended auto-enrollment in overdraft services. Now, banks have to ask for permission before charging you up the wazoo with overdraft fees.
Another change was tucked away in the Dodd-Frank Act by Senator Dick Durbin, D-IL (who’s still in Congress today, by the way). The Durbin Amendment limited the amount of interchange fees that big banks—specifically, banks with assets over $10 billion—can charge to businesses. These interchange fees work like this: you swipe your debit card to pay for something, and the big bank charges the merchant to process the payment.
The Durbin Amendment ultimately slashed in half big bank revenue from merchant processing fees.
“This impacted consumers directly, not just retailers or banks,” says Andrew Rombach, the managing editor and leader of the bank accounts review team at LendEDU. “For example, consumers might be required to spend a $5 or $10 minimum for a card swipe.”
The Aftermath of the Dodd-Frank Act
Dodd-Frank has been somewhat successful in reigning in fees overall. In 2009, just before the Dodd-Frank Act was passed, banks charged the highest amount ever for fees—$46 billion. Since the act was passed, however, fees have dropped off by nearly $10 billion and remained relatively constant.
But this doesn’t mean you’re out of danger just yet. Like a game of whack-a-mole, banks have began charging new and higher fees elsewhere in response to the new fee limits, caps, and regulations.
“Dodd-Frank also established compliance hurdles for big banks, increasing their costs. So to cover this, for example, there was an overall increase in monthly service fees over time, costing the consumer more,” says Rombach. “In short, regulation curbed some fees and ended consumer-expensive banking practices, but it also spurred big banks to raise their charges overall in light of increasing costs.”
Today, many consumers pay about $30 per overdraft charge, or even more.
To boot, banks are making it harder for you to skirt these account service fees: the average minimum account balance required to avoid these fees has gone up from around $4,000 to almost $6,500. With a change like this, more people will be hit with these account service fees each month.
What can you do?
First, it’s important to read up on how your bank account works. Much like your credit card, every savings account comes with a Truth-In-Savings disclosure. Sometimes, there may be a separate fee statement. And, just like your credit card agreement, you probably tossed this out. But, for most banks, you can still find this information online, such as Chime Bank’s disclosure.
“While a consumer could certainly spend more today in fees compared to a decade ago, it’s also entirely possible that a consumer can go the whole year without paying any of these fees on their bank accounts,” says Rombach.
“While fees have risen, there are still avenues open to avoid these fees,” he says.
In fact, knowing how fees work can help you avoid bank fees entirely, even if it means switching to a bank that doesn’t charge fees.