Why Should Banks Not Add New Customer Fees?

The Wall Street Journal reports that Bank of America (NYSE: BAC) may add new consumer bank fees, several months after it withdrew a plan to charge $5 for some transactions. The press and customer backlash against the $5 plan was so strong, that Bank of America saw the fee plan as a public relations disaster. Other large consumer banks have begun efforts to soak customers too. There is no reason not to. Banks could lose customers, but they also could improve margins and sales. This is the normal reward and risk model common throughout most of the business world. There is no reason banks should be exempt.

The Bank of America $5 fee catastrophe showed that many bank customers believe nearly free service is somehow their right. These customers keep money with the banks, sometimes very little, and the banks have the obligation to provide free service in return. It does not matter to customers, or perhaps does not dawn on them, that their accounts may lose the banks money.

The bargain the largest consumer banks, which include Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and JP Morgan Chase (NYSE: JPM), appear willing to make soon is that they can increase fees enough to more than offset any loss of customers. Each firm may assume that inertia will hold almost all of their customers with them. They may be able to press some of these people to bank online, which is less expensive for the banks. Or the big financial firms may secretly want their smaller, money-losing customers to leave. Regardless, the banks join a long line of industries, from auto manufacturers to retailers, that are not prepared to lose money on every consumer transaction and hope to make it up in volume. Even a first-year business school student knows that model has only negative financial effects.

Big banks will add fees. Customers and the press will object. The federal government may even say that some of the fees are not reasonable under new consumer protection laws. The banks will adjust their fees so that they are. Customers will leave, but probably not in large enough numbers to offset the advantages of charging clients to make up for losses.

Douglas A. McIntyre