Cover-Features 5-2-05
S P E C I A L
S E C T I O N Banking
To fee or not to fee For most banks, it’s not a question — they do it to offset free services PHOTO/JEFF LOUGHLIN
BY JOHN TODARO
ank technology, such as ATMs and online banking, were supposed to cut costs, as were economies of scale. So why are bank fees for various services still part of the landscape among banks both big and small, ask those who contend that banks should easily turn a tidy profit on deposits alone? That assumption is wrong, say sources from three local banks, along with the American Bankers Association (ABA) and the Massachusetts Banking Association (MBA). Banks maintain that their “spread,” or the difference between what they earn from loans and what they pay out to depositors, does not cover their costs. Banks have no choice but to supplement interest income with non-interest income, or “field income,” in the form of fees for things such as monthly maintenance, overdrafts and returned checks. Some banks, such as Bank of America, now New England’s largest bank, even charge regular checking accounts for teller assistance as of the second monthly incidence. “Peo-
B
Country Bank for Savings marketing Vice President Patti Mitchell and President Paul Scully at the bank’s Charlton branch. Bank services are getting more complex, Mitchell says, making them more costly to administer and maintain.
ple have to realize that banks are a business, and they have to run their business profitably,” says Patti Mitchell, vice president of marketing at Country Bank for Savings, the 20th biggest bank in Massachusetts, with 13 branches, including new branches in Charlton and Paxton. Banks don’t charge for the relatively costly process of opening a checking account. That’s because checking accounts are the “hook” that draws customers in to buy other, more profitable services, such as equity credit lines, car loans and certificates of deposit (CDs). Bank representatives unanimously maintain that banks offer more services than ever, at more branches and ATMs than ever, across the mostever other “alternative distribution channels” such as online and phone banking — all for a bargain — especially considering the magnitude of federal regulations that banks have to comply with, including the post-9/11 [anti-terrorist] Patriot Act. This law is so broad-ranging that it amended four other Acts along the way, including an anti-money-laundering act. The Patriot Act also calls for new internal bank policies, procedures and controls, customer identification standards (for both domestic and foreign customers), suspicious activity reports, training programs and independent audits, as well as new surveillance and investigative powers of law enforcement.
Southbridge Savings Bank helps us to build and sell our new homes.
James C. Haynes, Sr. JCJ, Inc.
“JCJ’s relationship with your whole bank is very important to us, including both front line and back room employees. Southbridge Savings Bank has been instrumental in financing our construction projects. Having Southbridge Savings Bank employees available to speak with our customers about mortgage financing speaks volumes about the bank’s commitment to JCJ and future business.” To learn more about how Southbridge Savings Bank can assist you or your small business call today or stop by any one of our conveniently located full-service branches. Apply for a mortgage seven days per week at any of our in-store branches, or apply on-line anytime!
Southbridge · Sturbridge · Charlton · West Warren · Holden · Worcester · Big Y Southbridge Big Y Spencer · Big Y Worcester · Shaw’s Webster · Big Y Amherst · Big Y West Springfield www.southbridgesavingsbank.com · 800-939-9103
28
Worcester Business Journal • May 16, 2005
MEMBER
MEMBER
FDIC DIF
The hidden costs of regulatory compliance According to a nationwide “Compliance Watch 2003” survey of more than 1,000 financial institutions conducted in 2003, the Patriot Act has a direct impact on all three components that comprise the costliest federal bank regulation, “Bank Secrecy/anti-money laundering (AML)/ Office of Foreign Assets Control (OFAC).” The survey was sponsored by the ABA Banking Journal, Banker Systems Inc. and the ABA. Yet despite the survey’s findings, banks are reluctant to quantify the cost of the Patriot Act or any other regulatory burden, let alone suggest that any such cost is passed on to customers in a systematic way. “Fees go up with inflation, but not in lock step with banks’ added expenses,” says John Merrill, Sovereign Bank’s market president for community banking in Massachusetts. www.wbjournal.com
S P E C I A L Similarly, in response to questions about the connection between cost and regulation, ABA Associate Director John Hall asserts, “You’re trying to make a hypothesis that isn’t there.” Banks treat regulatory burden as a necessary evil shared by all banks that would cost even more if they sat around calculating all the costs. As Sovereign’s Merrill put it, “The goal is to meet compliance without disrupting business.” Regulatory compliance calls for a cocktail of internal staff, lawyers, consultants, training, software, forms and a constant process of monitoring, recordkeeping and communication that is so complicated and time-consuming that bankers routinely refer to the chore as the “regulatory burden.” Customers get a small taste of what that burden entails whenever they sign the dozens of pages required to finance or refinance a home; each page addresses a different federal regulation. And on top of all their shrinking margins, banks have to adjust their business model every time the prime rate fluctuates.
tous systems. Bank of America charges their customers $1.50 for external-ATM transactions, a charge easily avoided by staying within their worldwide network of 13,000 ATMs. • Savvy shoppers can easily avoid fees if that’s their goal. Credit unions and mutual banks tend to offer among the lowest fees, even if their branches and ATMs may be restricted to a small region. Country Bank’s Mitchell suggests that customers can avoid paying foreign-ATM fees at 2,800 ATMs by banking at Country Bank or any other of over 500 banks that participate in a “SUM network” in which banks don’t surcharge one another’s customers. Separately, Briand says that Middlesex Bank rebates their customers for any foreign-ATM fees, even though Middlesex offers 17 branches and 125 ATMs of its own. It’s how you manage the margins A few years ago, when interest rates were at a record low, banks benefited from the high volume of mortgage refinancing. Today, banks
don’t have that luxury. In fact, according to ABA’s Hall, a bank’s spread remains relatively steady — the average might be about 2 percent — regardless of the current interest rate. One could argue that low interest rates are better in that they stimulate new and refinanced loans. Others, such as Middlesex’s Briand, expect rising interest rates to provide relief for bankers over the long haul, but add that “even in that scenario, banks’ fees would remain unchanged in the interest of maintaining a steady non-interest-rate-sensitive income stream.” Others still, including Country Bank’s Mitchell, believe “it’s all in how you manage the margins.” This lack of consensus is yet another indication of how subjective “best practices” are in the banking industry. Some bankers, including Mitchell, predict a growing tendency for banks to target their most profitable customers with tailored programs that bundle sets of services that the customers use or need, while eliminating the fees that those cus-
S E C T I O N Banking tomers are accustomed to paying. “We have to adapt,” Mitchell says, “it’s an ever-changing industry, and it’s hard to keep up with the demands of consumers, the demands of technology and the demands of regulations. It’s a daunting task, and it’s not getting any easier; in fact, I think the complexities will increase dramatically.” It should be interesting to watch the next chapter unfold as consolidations and mortgages slow down in an industry that has a knack of reinventing itself every few years with new services and streamlined efficiencies. As ABA’s Hall states, “Considering all the regulatory burden that banks bear, plus the multitude of services that have arisen in the last decade, bank customers get a better bang for their buck than ever before.” John Todaro is a contributing writer. He can be reached at [email protected]
Less banks but more branches Meanwhile, customers are constantly asking for more branches and other conveniences, including ATMs, supermarket branches, telephone banking, online banking (including live chat features) and cash-management services such as direct deposits, all of which take a toll on a bank’s bottom line. “Industry observers predicted that by providing ‘alternative distribution channels’ to their customers, banks would be able to reduce the number of their branches, but that hasn’t happened,” says the MBA Director of Communications Bruce Spitzer. Instead, banks have added almost 20 percent more branches in Massachusetts since 1985, even as the number of banks in the state dropped by 45 percent, from 390 to 215, he says. The only maintenance cost that any of our respondents pin down is the cost of buying and maintaining ATMs. Spitzer says ATMs cost between $9,000 and $50,000, plus maintenance costs of $12,000 to $15,000 per year for rental space, scheduled cash replenishments, general servicing and phone costs. As an example, it costs Sovereign Bank between $2.88 million and $8.9 million to operate its 317 ATMs in Massachusetts alone. To fee or not to fee So just how do banks decide how to recoup the costs that exceed their spread’s return? Bankers provide only generalized answers to that question. This writer asked a packrat friend to dig deep into his collection of bank fee schedules to flag these tendencies: • Minimum balances have increased significantly at many banks over the past five years: in 2000, Fleet charged a $2.50 monthly fee for regular checking accounts, with no minimum balance requirements; in 2005, Bank of America, which acquired Fleet, charges $8 per month if you do not maintain a minimum average daily balance of $750 or a minimum combined balance of $5,000. • Disincentives, such as $20+ late-payment fees and overdraft fees, offer a profitable way to let non-compliant customers carry the load. • Bounce-protection fees allow people to overdraft without a traditional overdraft line of credit, but not without getting charged a substantial fee for each occurrence, according to James Briand, senior vice president and director of marketing at Middlesex Savings Bank, the second biggest mutual bank in Massachusetts. Regulators may soon require banks to notify consumers in advance when they’re about to trigger such a fee, which actually functions as a short-term loan. • Larger banks are more likely to charge foreign-ATM fees, to carry the cost of their ubiquiwww.wbjournal.com
May 16, 2005 • Worcester Business Journal
29
S E C T I O N Banking
To fee or not to fee For most banks, it’s not a question — they do it to offset free services PHOTO/JEFF LOUGHLIN
BY JOHN TODARO
ank technology, such as ATMs and online banking, were supposed to cut costs, as were economies of scale. So why are bank fees for various services still part of the landscape among banks both big and small, ask those who contend that banks should easily turn a tidy profit on deposits alone? That assumption is wrong, say sources from three local banks, along with the American Bankers Association (ABA) and the Massachusetts Banking Association (MBA). Banks maintain that their “spread,” or the difference between what they earn from loans and what they pay out to depositors, does not cover their costs. Banks have no choice but to supplement interest income with non-interest income, or “field income,” in the form of fees for things such as monthly maintenance, overdrafts and returned checks. Some banks, such as Bank of America, now New England’s largest bank, even charge regular checking accounts for teller assistance as of the second monthly incidence. “Peo-
B
Country Bank for Savings marketing Vice President Patti Mitchell and President Paul Scully at the bank’s Charlton branch. Bank services are getting more complex, Mitchell says, making them more costly to administer and maintain.
ple have to realize that banks are a business, and they have to run their business profitably,” says Patti Mitchell, vice president of marketing at Country Bank for Savings, the 20th biggest bank in Massachusetts, with 13 branches, including new branches in Charlton and Paxton. Banks don’t charge for the relatively costly process of opening a checking account. That’s because checking accounts are the “hook” that draws customers in to buy other, more profitable services, such as equity credit lines, car loans and certificates of deposit (CDs). Bank representatives unanimously maintain that banks offer more services than ever, at more branches and ATMs than ever, across the mostever other “alternative distribution channels” such as online and phone banking — all for a bargain — especially considering the magnitude of federal regulations that banks have to comply with, including the post-9/11 [anti-terrorist] Patriot Act. This law is so broad-ranging that it amended four other Acts along the way, including an anti-money-laundering act. The Patriot Act also calls for new internal bank policies, procedures and controls, customer identification standards (for both domestic and foreign customers), suspicious activity reports, training programs and independent audits, as well as new surveillance and investigative powers of law enforcement.
Southbridge Savings Bank helps us to build and sell our new homes.
James C. Haynes, Sr. JCJ, Inc.
“JCJ’s relationship with your whole bank is very important to us, including both front line and back room employees. Southbridge Savings Bank has been instrumental in financing our construction projects. Having Southbridge Savings Bank employees available to speak with our customers about mortgage financing speaks volumes about the bank’s commitment to JCJ and future business.” To learn more about how Southbridge Savings Bank can assist you or your small business call today or stop by any one of our conveniently located full-service branches. Apply for a mortgage seven days per week at any of our in-store branches, or apply on-line anytime!
Southbridge · Sturbridge · Charlton · West Warren · Holden · Worcester · Big Y Southbridge Big Y Spencer · Big Y Worcester · Shaw’s Webster · Big Y Amherst · Big Y West Springfield www.southbridgesavingsbank.com · 800-939-9103
28
Worcester Business Journal • May 16, 2005
MEMBER
MEMBER
FDIC DIF
The hidden costs of regulatory compliance According to a nationwide “Compliance Watch 2003” survey of more than 1,000 financial institutions conducted in 2003, the Patriot Act has a direct impact on all three components that comprise the costliest federal bank regulation, “Bank Secrecy/anti-money laundering (AML)/ Office of Foreign Assets Control (OFAC).” The survey was sponsored by the ABA Banking Journal, Banker Systems Inc. and the ABA. Yet despite the survey’s findings, banks are reluctant to quantify the cost of the Patriot Act or any other regulatory burden, let alone suggest that any such cost is passed on to customers in a systematic way. “Fees go up with inflation, but not in lock step with banks’ added expenses,” says John Merrill, Sovereign Bank’s market president for community banking in Massachusetts. www.wbjournal.com
S P E C I A L Similarly, in response to questions about the connection between cost and regulation, ABA Associate Director John Hall asserts, “You’re trying to make a hypothesis that isn’t there.” Banks treat regulatory burden as a necessary evil shared by all banks that would cost even more if they sat around calculating all the costs. As Sovereign’s Merrill put it, “The goal is to meet compliance without disrupting business.” Regulatory compliance calls for a cocktail of internal staff, lawyers, consultants, training, software, forms and a constant process of monitoring, recordkeeping and communication that is so complicated and time-consuming that bankers routinely refer to the chore as the “regulatory burden.” Customers get a small taste of what that burden entails whenever they sign the dozens of pages required to finance or refinance a home; each page addresses a different federal regulation. And on top of all their shrinking margins, banks have to adjust their business model every time the prime rate fluctuates.
tous systems. Bank of America charges their customers $1.50 for external-ATM transactions, a charge easily avoided by staying within their worldwide network of 13,000 ATMs. • Savvy shoppers can easily avoid fees if that’s their goal. Credit unions and mutual banks tend to offer among the lowest fees, even if their branches and ATMs may be restricted to a small region. Country Bank’s Mitchell suggests that customers can avoid paying foreign-ATM fees at 2,800 ATMs by banking at Country Bank or any other of over 500 banks that participate in a “SUM network” in which banks don’t surcharge one another’s customers. Separately, Briand says that Middlesex Bank rebates their customers for any foreign-ATM fees, even though Middlesex offers 17 branches and 125 ATMs of its own. It’s how you manage the margins A few years ago, when interest rates were at a record low, banks benefited from the high volume of mortgage refinancing. Today, banks
don’t have that luxury. In fact, according to ABA’s Hall, a bank’s spread remains relatively steady — the average might be about 2 percent — regardless of the current interest rate. One could argue that low interest rates are better in that they stimulate new and refinanced loans. Others, such as Middlesex’s Briand, expect rising interest rates to provide relief for bankers over the long haul, but add that “even in that scenario, banks’ fees would remain unchanged in the interest of maintaining a steady non-interest-rate-sensitive income stream.” Others still, including Country Bank’s Mitchell, believe “it’s all in how you manage the margins.” This lack of consensus is yet another indication of how subjective “best practices” are in the banking industry. Some bankers, including Mitchell, predict a growing tendency for banks to target their most profitable customers with tailored programs that bundle sets of services that the customers use or need, while eliminating the fees that those cus-
S E C T I O N Banking tomers are accustomed to paying. “We have to adapt,” Mitchell says, “it’s an ever-changing industry, and it’s hard to keep up with the demands of consumers, the demands of technology and the demands of regulations. It’s a daunting task, and it’s not getting any easier; in fact, I think the complexities will increase dramatically.” It should be interesting to watch the next chapter unfold as consolidations and mortgages slow down in an industry that has a knack of reinventing itself every few years with new services and streamlined efficiencies. As ABA’s Hall states, “Considering all the regulatory burden that banks bear, plus the multitude of services that have arisen in the last decade, bank customers get a better bang for their buck than ever before.” John Todaro is a contributing writer. He can be reached at [email protected]
Less banks but more branches Meanwhile, customers are constantly asking for more branches and other conveniences, including ATMs, supermarket branches, telephone banking, online banking (including live chat features) and cash-management services such as direct deposits, all of which take a toll on a bank’s bottom line. “Industry observers predicted that by providing ‘alternative distribution channels’ to their customers, banks would be able to reduce the number of their branches, but that hasn’t happened,” says the MBA Director of Communications Bruce Spitzer. Instead, banks have added almost 20 percent more branches in Massachusetts since 1985, even as the number of banks in the state dropped by 45 percent, from 390 to 215, he says. The only maintenance cost that any of our respondents pin down is the cost of buying and maintaining ATMs. Spitzer says ATMs cost between $9,000 and $50,000, plus maintenance costs of $12,000 to $15,000 per year for rental space, scheduled cash replenishments, general servicing and phone costs. As an example, it costs Sovereign Bank between $2.88 million and $8.9 million to operate its 317 ATMs in Massachusetts alone. To fee or not to fee So just how do banks decide how to recoup the costs that exceed their spread’s return? Bankers provide only generalized answers to that question. This writer asked a packrat friend to dig deep into his collection of bank fee schedules to flag these tendencies: • Minimum balances have increased significantly at many banks over the past five years: in 2000, Fleet charged a $2.50 monthly fee for regular checking accounts, with no minimum balance requirements; in 2005, Bank of America, which acquired Fleet, charges $8 per month if you do not maintain a minimum average daily balance of $750 or a minimum combined balance of $5,000. • Disincentives, such as $20+ late-payment fees and overdraft fees, offer a profitable way to let non-compliant customers carry the load. • Bounce-protection fees allow people to overdraft without a traditional overdraft line of credit, but not without getting charged a substantial fee for each occurrence, according to James Briand, senior vice president and director of marketing at Middlesex Savings Bank, the second biggest mutual bank in Massachusetts. Regulators may soon require banks to notify consumers in advance when they’re about to trigger such a fee, which actually functions as a short-term loan. • Larger banks are more likely to charge foreign-ATM fees, to carry the cost of their ubiquiwww.wbjournal.com
May 16, 2005 • Worcester Business Journal
29
