I know these days savings accounts don’t pay a lot in interest, but Daniel Ganziano found himself losing hundreds for holding $4.85 in his bank account. It’s not some new negative rate of interest. By the time his bank (TCF Bank) had finished totaling bank charges associated with carrying too low of a balance on his savings account, the boy owed nearly $230 dollars.
How Does One Lose Money in a Savings Account?
How does a positive balance on a savings account end in owing over $230 in bank fees? The Chicago Tribune reports:
He had all but forgotten about the account until he received a letter from TCF on Oct. 12 saying six days earlier, it had charged him a $9.95 “monthly maintenance fee” because his account had too little money in it.
The $9.95 charge made his account overdrawn by $5.10, which triggered another fee. At TCF, any account overdrawn by more than $5 is charged a $28-a-day overdraft fee. The net result: Ganziano was $33.10 in the hole.
By then, his nascent savings account was in a downward spiral. At $28 a day, the charges were adding up quickly.
When he and his mother went to the nearest branch that weekend to close the account, they were told they would first have to pay the accumulated fees, which totaled $229.10.
Why Banks Make Money from Bank Charges
The story in the Chicago Tribune points out that the boy’s mother had helped open the account to teach her son about banking and bank charges are definitely a lesson everyone needs to understand.
Traditionally banks made money by borrowing and lending money. There was an old banker’s joke about an industry rule known as the “3-6-3 rule.” Bankers paid 3% interest to savers, charged 6% interest on loans and then hit the golf course by 3 in the afternoon. Simply put, by paying savers less than what they charge people seeking a loan (known as a spread), banks could earn money from the interest discrepancy.
However, as banking modernized, financial institutions learned that they could also make money on a variety of new products like debit and credit cards. Banks also began making some services free to entice new customers. The rise of bank charges were a way to earn income off of the now free services.
Once, interest income was all the profit banks made. Today non-interest income makes up nearly 50% of the industry’s earnings. The chart below shows the rise of non-interest income over the last 30 years.
Don’t Buy into the “Small Banks Don’t Charge Fees” Myth!
I bank at a credit union and the bank charges are minimal. But, this is not because the institution is small; it is because I’ve shopped around for banks that don’t try to nickel-and-dime their customers.
Since many small institutions have lower bank charges, it has become street wisdom to believe that small banks won’t ante up the bank charges like large commercial banks. This is a myth.
According to a Chicago Fed study, smaller lending institutions make nearly twice as much, as a percentage of income, charging fees to customers than large commercial banks do. I learned this lesson first hand when a local credit union provided me a good faith estimate on a mortgage refinance. The closing costs were nearly double those I paid to purchase my home.
Common Bank Charges by Bank Revenue
It would take too long to create an exhaustive list of fees you might find from a bank. I’ve heard of commercial banks charging fees for calling customer service too much. Instead, I’ve pulled the most common fees by the percentage of income banks earn from them:
- Deposit Fees (51.6% of noninterest income) – These include early withdrawal fees, late fees, minimum balance fees, overdraw fees, maintenance fees and return check fees.
- ATM Fees (1.16% of noninterest income) – These are the charges you pay to get your money back through an ATM
- Credit Card Fees (.72% of noninterest income) – These are late fees, finance charges and interest above and beyond market rates.
Make sure you shop around and read the fine print. You may not anticipate overdrawing your account, but that does not mean it will never happen.