Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Last year my bank got swept up in the sub-prime loan crises and was about to fail. I knew that my money was FDIC insured, but the deposit accounts were about to be taken over by another bank. Rather than simply accept whatever new bank came along to buy out my old bank, I went out and started to do some research on a new bank.

The last time that I changed banks was in 2000, and my recollection of the options back then was not good. I was an early adopter to the “internet only” style of banking, primarily because internet banking offered better than average interest rates and lower than average fees.

This time around I was prepared for a long, arduous search for the type of banking to which I had become accustom. I started my search at, where I start most of my searches for banking products. I quickly found, to my surprise, that it was relatively easy to find checking and savings accounts (mostly money markets) that paid high interest rates and had very low or no fees — even at some of my least favorite institutions like Bank of America and Citibank.

It was not until I read a number of posts on some other personal finance blogs and forums that made me realize why it was so easy to find the accounts I sought: I was able and willing to carry a relatively high balance. At EverBank, where I eventually set up banking, the minimum balance required is $1500. In keeping this balance, I do not have to pay a $4.95/month maintenance fee, nor do I pay an additional $4.95 per month for online billpay.

Quite clearly, if I were living paycheck to paycheck, I would not be able to maintain this balance. As it is, I actually earn $6-$7 per month in interest on this minimum balance. As I thought more about this I realized that in my less enlightened days, I used to keep a few hundred dollars at most in my bank account. There’s no way I would have been able to maintain this kind of balance.

Many people I know, and many of the people on personal finance forums, who are struggling to get their financial houses in order are clearly unable to pay the fees associated with maintaining interest bearing accounts, or at best simply earn no interest. Earning no interest is the same as taking a loss when inflation is taken into account.

Banks clearly need to make money, but it seems to me quite regressive to make the people with the least amount of money pay these fees. The banks obviously make some money from the pass through of lending other deposit accounts at a higher rate, but would the rate suffer that much to reduce the fees, or are most banks simply being predatory? What do you think?

If you liked this article, you may be interested in seeing some related articles:

5 Responses to “Bank Fees are for Poor People”

  1. ScrapperMom Says:

    I agree that it seems the banks are adding insult to injury. Take a bounced check for example, not only do you suffer the implications of a bounced check, but you also get hit with a fee of upwards of $25! So you didn’t have the money for the check and now you have a negative balance after they deduct the fee. It seems like there must be a better way they could deal with that other than putting people even deeper in the red. I suppose it’s a good advertisement to make sure your accounts are linked so you have overdraft protection. Of course this is assuming you have money somewhere else.

  2. Matt Says:

    A bank’s profit on an individual account is a function of the yield spread it can earn between the borrowing rate and lending rates and the average amount of money in the account. Over the past few years, the yield curve has been very flat and credit spreads have been very tight, both reducing banks’ net interest margin. Therefore, it would be harder for a bank to recover the marginal cost of operating an individual account unless that account contained a meaningful amount of money. I think it’s more a function of profit margins than being predatory. I’d expect banks to start offering more incentives over the next year or two as the Fed increases margins once again. That said, fees like $25 for a bounced check are too high and I agree with ScrapperMom’s suggestion since most people could get overdraft protection if they did some research.

  3. MITBeta Says:

    Thanks, Matt. Do you have any sense for what kind of increase in yield spread on higher balance accounts would be required to reduce many of the account maintenance and other fees tacked on to lower balance accounts? Not that I expect banks to give up the profits that they have become accustom to receiving and fees that many have become accustom to paying simply because the yield rises, but it’s an interesting question in the academic sense anyway.

  4. Matt Says:

    I don’t know the answer to that, and it probably differs significantly between banks depending on how much of their financing comes from savings deposits. However, to give you an idea on profitability relative to yield spreads, commercial banks typically run about 10x leverage, so if they can earn an extra 0.20% in yield spread on savings deposits and half of their financing comes from deposits, that additional spread alone translates into about 1% of extra annualized return on equity. That should cover a lot of wire transfer fees!

  5. MITBeta Says:

    I’m not talking about fees like wire transfer, but rather just “account maintenance” fees. I saw a Louis C.K. stand-up routine the other day where he was talking about having to pay $15 in order to have $20.

    Also, apparently banks are also spending money like sailors on leave in trying to recruit new customers, to the tune of $400 to $1000 per new customer. This cuts into customer returns.