Could This Bring About The End of Consumer Banking?
I begin this blog with an old Arabian proverb: “If the camel once gets his nose in the tent, his body will soon follow.”
Well, thanks to a recent decision by Bank of New York Mellon, the camel’s nose is now inside the tent.
Can his body be far behind?
Imagine in the near future receiving your bank statement and discovering that your bank charged you for keeping your savings safe.
Most likely, given the shameful interest rates being paid on savings today, with the bank’s new “safekeeping” fee, you’d actually see a drop in your principle.
Aha, you don’t think this is possible? You’re wondering if I’ve been smoking something.
Well, think again as the folks at the Bank of New York Mellon set the stage by recently introducing an interest rate charge of 0.13% on deposits of $50 million and over. This is the camel’s nose inside the tent.
Draconian changes like this often start out small – impacting only a small number of consumers. Upon hearing about it, the rest of us breathe a sigh of relief – believing we are lucky to escape such an unwanted, unfair, charge.
Yet, while we’re basking in relief, across the country bankers are likely sitting in conference rooms working on plans to add this safekeeping charge to all deposits. Their goal is to push the entire camel into the consumer banking tent – the sooner, the better.
Once the decision is made to “stick it to the poor saver,” the marketing folks are invited to the meeting and asked to come up with a plan to convince customers that it’s a positive change and that they should be happy to pay it.
Right now you are probably asking yourself, why would my bank start charging me to keep my money on deposit?
Simple – it’s the result of the never-ending recession where banks are seeing a massive inflow of deposit money while being unable to lend it to businesses or consumers. While your savings and checking deposits are sitting in the bank unable to be loaned, the bank is paying for FDIC insurance on your money.
So, instead of paying you a paltry 20 basis points of interest for your deposit balances while lending the funds at 3.50%, the bank is out the 50 basis points plus what it costs to hold your deposits plus paying for FDIC insurance. In other words, without the typical net interest margin from lending, the bank is losing money on your deposits.
This has become a major problem for most banks and credit unions as they’ve seen a massive inflow of deposits since the financial collapse of 2007. According to Dan Geller, executive VP of Market Rates Insight, “Domestic deposits increased by over a trillion dollars since the official start of the recession in December of 2007 despite the fact that the average interest rate paid on these deposits decreased from 3.82% to 0.82% – a decrease of 300 basis points.”
You might recall reading media stories last year about some banks refusing to take new deposits as they were awash in deposit money they couldn’t loan. One such story by Paul Davis, “In Cash Glut, Banks Try to Discourage New Deposits,” was posted to the American Banker website on July 26, 2010. A Google search on the title will take you to this article.
Now, from a purely financial point of view, a case can be made that if your bank is doing you a favor by paying interest on, and insuring, your money while being unable to generate income from loaning it to borrowers, it is losing money and has a responsibility to correct the problem.
As I see it, the bank has at least four options:
- Charge you a monthly “safekeeping” fee to cover its costs.
- Stop paying monthly interest to minimize the loss.
- Ask you to withdrawal your money and take it elsewhere.
- Do nothing and absorb the loss while hoping the economy recovers soon.
Unfortunately, these choices place the bank between a rock and a hard spot.
The first three options will be viewed as punitive, mean-spirited, and unacceptable by a majority of consumers. And unless all banks and credit unions act in unison what follows will be a mass migration of banking customers seeking a better deal elsewhere.
If you don’t believe me, just consider what is happening as banks drop free checking.
The fourth option will best serve consumers as it retains the status quo during a period when they are already being hammered by pricing and product changes while earning little or no interest on deposits.
Just yesterday, the Fed announced it would be keeping its fed funds rate extremely low until at least mid-2013.
In effect, taking into account the current 3.6% rate of inflation, your deposits are already worth less every month. Adding a safekeeping fee would add insult to injury.
Assuming that eventually Mellon’s new deposit charge or fee works its way into consumer banking, which is almost a sure thing in the near future, how would consumers react – especially if the fee is assessed by all banks and credit unions in unison?
Could such a fee be the proverbial “straw that breaks the camel’s back?”
Instead of paying the fee, I believe it’s possible that millions of consumers would react emotionally – or rationally, depending on your perspective – by pulling their deposits and either keeping their money at home, putting it into prepaid debit cards, buying gold and silver coins, buying low-yielding government bonds, investing in the stock market, keeping it in a safe deposit box, or some combination of these options.
Anything to stick it to the banks!
And let’s not forget the young tech guys like Jack Dorsey, Twitter co-founder and founder of Square. These guys dislike traditional banking and are quick to develop new software and companies to provide alternatives to your local bank or credit union. I can envision them already working on an alternative to saving money at your local bank or credit union.
And finally, let’s not forget the elephant in the room – Walmart.
If, and when, Walmart is ever approved for a consumer banking license, not only could it become the biggest purveyor of free checking, it could provide savings accounts that pay some interest with no safekeeping fee. After all, its ubiquitous branches have a different cost/revenue structure than traditional bank branches.
Is it possible that by introducing a new monthly deposit safekeeping fee, it could be the beginning of the end for consumer banking as we know it today?
You have to ask yourselves – can consumers be pushed to the point where they’ll abandon their neighborhood bank or credit union and go elsewhere?
ADDITIONAL INFORMATION: Dan Geller’s article about the Bank of New York Mellon’s new interest charge for deposits of $50 million and over, “Banking on ‘Capital Insurance,” was posted to the BAI Banking Strategies website August 8, 2011. You’ll find the article doing a Google search on the article title.