We Will All Have to Pay for Financial Reform

Banks have been in the "freemium" business since well before that became a Web 2.0 catch phrase. Similar to the way that companies like Skype offer their products for free to millions of users while only a fraction pay, banks have been offering services like free checking to their customers for decades, while imposing fees on a small minority. This subsidy is a staple of the banking industry, and it's under attack.

When the Fed steps into the fray to prevent banks from penalizing you with overdraft fees, or from raising your APR if you miss a payment, it means that banks can't recoup the costs of offering all those free services, so they're forced to invent new fees. Banks aren't charities -- they're in the business to make money, whether it benefits us consumers or not. And when the Fed keeps them from punishing those few who overdraw their accounts or miss their payments, they aren't just going to take it in stride, they're going to make the rest of us pay for it. The only parties that don't have to pay are the ones responsible for this whole mess -- overextended Americans and the banks that feed off of them.

The Banks: Regulate us all you want, we'll just raise prices elsewhere

With the most recent round of bank earnings announcements, bank executives made it very clear that they won't be twiddling their thumbs while profits erode. Jamie Dimon of JPMorgan Chase put it best, when explaining how his bank will deal with financial reform:

"If you can't charge for the soda, you're going to charge more for the burger" - Jamie Dimon, CEO, JP Morgan Chase

And Dimon's friends have also been reassuring investors that any regulatory impact will be "mitigated" by increasing prices elsewhere:

"The mitigating actions are from the revenue side ... different types of fee structures, higher minimum balances, still charging for overdrafts..." - Brian Moynihan, CEO, Bank of America

"Joe Price and his team are working diligently to determine the appropriate ways to mitigate the impact of Durbin. Some of those mitigating actions made occur in other business segments of Bank of America and wouldn't necessarily be reflective in the card segment. " - Brian Moynihan, CEO, Bank of America (while talking about the Durbin Amendment)

"I'll ... provide you some additional color on the potential impact to SunTrust of regulatory reform... the situation is fluid, and we are in the process of thoroughly evaluating the possible implications and the mitigating actions." - Mark Chancy, CFO, SunTrust Bank

They made no secret of how they plan to "mitigate" the effects. They're going to raise fees and prices on other financial products dollar-for-dollar to make up whatever they lose in overdraft fees or interchange fees:

"We'll go back to where we were 20 years ago where there will be kind of a certain number $5, $8, $9 stated charge for having a checking account every month" - Kelley King, CEO, BB&T

"Our goal in the thing is to at least make the thing revenue neutral" - William Cooper, CEO, TCF Financial

Translation: You will no longer be rewarded for good financial behavior

Consumer-facing regulatory changes over the past year tended to have one thing in common: preventing financial institutions from severely penalizing bad financial behavior. So Congress has decided that fees should now be paid more democratically by everyone. Let's illustrate why this is the case with a simple example.

Chase estimates that it costs about $300 to provide a free checking account. Compare that $300 number to an FDIC study, which states that the top 5% of overdrafters run up $1,610 in fees on average. This means that 5% of account holders pay for over 25% of checking accounts, on overdraft fees alone.

The same concept applies to credit cards as well. The CARD Act was meant to end the practices of imposing exorbitant fees and 30% penalty APRs on late credit card payments, along with other such evils. But in their place, we all got higher APRs, higher annual fees, and less attractive balance transfer offers.

It's important to separate consumer-facing regulatory reform like the CARD Act, Durbin Amendment, and Reg E, from regulations that are focused on keeping the financial system stable, like the Collins Amendment, Volcker Rule / Derivatives, and Deposit Insurance changes. When rallying for financial reform, we have to remember that every action has an equal and opposite reaction when you start threatening the profits of competitive industries.