After the last recession, Dodd-Frank and the FDIC raised deposit fees which prompted many banks to start including an “FDIC Assessment Fee” in their deposit account charge. The FDIC issued guidance in 2012 that labeled the practice as misleading, so most of those banks just changed the name to a “Deposit Assessment Fee” and kept the practice. One full recovery, one drop in assessment rates by the FDIC and a tax reform change later, and many banks are still at the practice.
Tag: Deposit Fees
Last week, Chase joined the ranks of Capital One, USAA, Frost Bank, OneWest, Huntington, Northern Trust and others and announced that in August, the Bank will no longer charge for overdraft transfers on its retail or small business accounts. In addition to eliminating the $10 transfer fee charge, Chase will also not allow customers to draw on their credit card line to fund overdrafts and will thus limit transfers from savings and established lines of credit. Why are these banks doing this and is this a trend?
In 1987 Robert Plath, a Northwest Airlines pilot, introduced the world to rolling luggage.
Since the transition from the steamer trunk to the suitcase around 1907, travelers and their porters had manhandled their belongings on trips much the same way. While some travelers started to use portable luggage carts in the 1970s, and a gentleman by the name of Bernard Sadow invented wheeled luggage, neither caught on for mass travel.
Last week we wrote about how some banks are already starting to raise rates and how banks are adding deposits due to lower energy prices creating more disposable income. In the past, we have also showed how today depositor, given the rate environment, is more fee / attribute sensitive, than rate sensitive. Because of the confluence of trends, community banks must make sure to get their deposit pricing right in order to optimize their positioning.
Usually, in the face of rising rates, banks increase their early withdrawal penalties in an attempt to stem customers from requesting their money back early so that customers can reinvest at higher rates. Increasing withdrawal penalties serve to increase liability duration and help bring convexity closer to zero. In a rising rate environment, this is exactly what you want as a bank. Oddly, banks are doing the opposite.
Early Withdrawal Penalties Are Shortening
Pick up almost any survey, from Pew to JD Power and you will find that deposit account fees are a significant driver of customer satisfaction. Often it is a major factor in choosing or leaving a bank. Unfortunately, many banks set their fees according to where their competitors are. If your bank does this understand that it is based on the fact that your competitors know what they are doing. The logic also presupposes that you are exactly like your competitor in terms of customer, geography, goals and strategy.
If the Federal Reserve does make a change in their target Fed Funds and Reserve rate on Thursday it will have many banks scrambling to take another look at their rates on deposits and their own asset-liability positions as it pertains to how fast their loans will reset (given floors, fixed rates, etc.). Unfortunately, few banks will stop to look at their fee structure on their deposit accounts. Considering that deposit fees can compose 70% of a bank’s fee income, this could be a mistake, especially because fee income streams are also interest rate sensitive.