The Big Fees Squeeze



A Report on Minnesota Banks and ATM's
December 1997


Prepared by Lea Schuster
MPIRG Consumer and Economic Rights Advocate



Researchers:

Students:
Augsburg College: Cassandra Herold; College of Saint Catherine: Audrey Dahl, Beth Peterson; Hamline University: Sarah Berge, Sara DeWaay, Martha Furman, Malia Hanson, Michael J. Paulsen, Sara Proper, Ben Rau, Brian Roegge, Erin Stojan; Macalester College: Brian Kramer, Lacey Hartmann; St. Olaf: Alex Dean, Kristianna Gehant, Pete Neviola, Jill Shearer, Kit Smith; University of Minnesota--Duluth: Ryan Dunnigan, Stephanie Eagelberth, Rich Harris, Brandon Krosch, Rebecca Lee, Heather Mead, Danielle Nugent, Andrea Sande, Melissa Schatzlein, ; University of Minnesota--Morris: Siri Hakala, Kirsten Olsen, Nathan D. Ryan; University of Minnesota--Twin Cities: Marit Bjordal, Michelle Crofton, Emily Irwin, Hilda Kurtz, Kelly Lundgren, Unny Nambudiripad, Sara Poplau, Xavier Tayo.

MPIRG Staff: Jeff Bartelson, Leslie Clapper-Rentz, Heather Cusick, Bill Droessler, Debora Holmes, Jonathan Guzzo, Sara Mannetter, Mike Rentz, Sheila Williams.

Editors: Jenifer Fennell, UMTC; Hilda Kurtz, UMTC; Eila Savela, Consultant; Bill Droessler, MPIRG Advocate, Heather Cusick, MPIRG Executive Director.

MPIRG would like to acknowledge the efforts of USPIRG and ACORN to report on the financial services industry and to advocate for consumer friendly and socially responsible change. The author would like to thank in particular Ed Mierzwinski of USPIRG and Jordan Ash of ACORN for their assistance.


Minnesota Public Interest Research Group
2414 University Avenue Southeast
Minneapolis, Minnesota 55414
(612) 627-4035

MPIRG is a student directed, non-profit organization that advocates for consumer protection, environmental preservation, and social justice.




Contents




SUMMARY

The Big Fees Squeeze takes an in-depth look at how the rising tide of bank fees is affecting the Minnesota financial services market. Other consumer groups have documented a steady and often steep increase in bank service fees nationally, but the Minnesota Public Interest Research Group's survey is unprecedented in its depth and focus on the cost of bank fees in Minnesota. This survey looks exclusively at the Minnesota market and offers a more detailed and comprehensive picture of the effects of rising fees on local consumers.

MPIRG students and staff surveyed 80 financial institutions and 178 ATM machines in 11 counties throughout the state. The survey covered the cost of four types of checking accounts, the ATM practices of financial institutions and retailers, and an array of service fees charged by Minnesota banks. This report describes the average costs charged to consumers and compares fees charged by type of institution.

MPIRG's findings reveal that the cost of financial services in Minnesota depends in part on the size and profit orientation of the institution. In almost every case, the large banks surveyed charge higher fees for checking accounts, ATM withdrawals, bounced checks, and services. Small banks surveyed usually charge less, while credit unions offer customers the best deal, with lower balance requirements, lower monthly service fees, and lower ATM charges. For example, when comparing the average annual cost of maintaining a checking account, big banks cost between forty-six and sixty-six percent more than credit unions, and up to seventeen percent more than small banks.

The MPIRG survey also reveals the increasing cost of ATM transactions. Many ATM customers are charged not only by their own bank, but also by the ATM owner for making a withdrawal. The survey shows how widespread this "double-dipping" is, and highlights who in the industry is surcharging the most, and the most often.

The MPIRG report concludes with recommended actions both for consumers who wish to minimize the cost of banking and for the Minnesota legislature. With stricter disclosure requirements, mandatory low cost checking accounts, and a ban on ATM surcharging, Minnesota consumers can make better informed choices in a more fair and competitive marketplace.


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INTRODUCTION

The nation's banks have earned record profits each year for the last six years, breaking the $50 billion mark for the first time in 1996.
(1) Alongside this trend, the financial services market has seen a continuing decline in competition and an increase in bank consolidation. (2) Banks nationwide have capitalized on deregulation by racing into mergers. (3) While record profits could mean greater access to services and lower costs for financial consumers, banks instead are sharply increasing revenues generated from customer service fees.(4)

The Big Fees Squeeze takes an in-depth look at how the rising tide of bank fees is affecting the Minnesota financial services market. Throughout the 1990's, consumer groups have documented a steady and often steep increase in bank service fees nationally(5), and while some of these surveys have included Minnesota banks, MPIRG's survey is unprecedented in its depth and focus on the cost of bank fees in Minnesota. Because the 1997 MPIRG survey looks exclusively at the Minnesota market, the report offers a much more detailed and comprehensive picture of the effects of rising fees on local consumers.

Students and staff of the Minnesota Public Interest Research Group surveyed 80 financial institutions and 178 ATM machines in 10 counties throughout the state. Of the 80 financial institutions surveyed, 15 were credit unions. Multiple branches of some banks were surveyed to ensure accurate reporting on different branch policies.

The MPIRG survey covered the cost of four types of checking accounts, the ATM practices of financial institutions and retailers, and a vast array of service fees charged by Minnesota banks. The report describes the average costs charged to consumers, and compares fees charged by type of institution. National figures from other consumer surveys are also compared.

MPIRG's findings reveal that the cost of financial services in Minnesota generally increases with the size of the institution, and corresponds negatively with the institution's profit orientation. Large banks consistently charge higher fees for checking accounts, ATM withdrawals, bounced checks, and a variety of other services. Small banks charge less, while credit unions offer customers the best deal, with lower balance requirements, monthly service fees, ATM charges, and service charges. For example, when comparing the average annual cost of maintaining a checking account, big banks cost between forty-six and sixty-six percent more than credit unions, and up to seventeen percent more than small banks.

The survey also reveals the increasing cost of ATM transactions. Many ATM customers are charged not only by their own bank, but also by the ATM owner for making an ATM withdrawal. MPIRG's survey shows how widespread this "double-dipping" is, and highlights who in the industry is surcharging the most and the most often.

With not-for-profit credit unions offering consumer-friendly competition, large banks inevitably have gone on the offensive by adding anti-competitive new fees like ATM surcharges and account closure penalties. Large banks are also attacking credit unions in the courts. (6) At each step the effect is to decrease competition, resulting in fewer and more costly choices for consumers.

Low and middle income consumers, especially those with fixed incomes, are more substantially burdened by the rising fees. (7) Paying $3.00 for every $20.00 withdrawn at an ATM, or paying $24.00 for every bounced check can put quite a dent in the account of someone earning only a few hundred dollars a week. With bank profits continuing to soar, these fee increases are shifted to the people who are least able to afford them.

The MPIRG report concludes with recommended actions both for consumers who wish to minimize the cost of banking, and for the Minnesota legislature. With stricter disclosure requirements, mandatory low cost checking accounts, and a ban on ATM surcharging, Minnesota consumers can make better informed choices in a more fair and competitive marketplace.



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SUMMARY OF APPLICABLE LAWS

Financial institutions doing business in the State of Minnesota are regulated by state and federal authority. All federal depository institutions are regulated by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board, while credit unions are governed by the Federal Reserve Board and the National Credit Union Administration (NCUA). The State of Minnesota also regulates financial institutions, although the scope of this regulation has been in some dispute, with consumer groups arguing that state consumer protection laws should apply to all financial institutions, whether chartered by the state or the federal government.
(8)

The Truth in Savings Act(9) applies to any deposit account held by a "consumer," a term that is defined as any individual who holds or is offered an account primarily for personal, family, or household purposes, but not an individual who holds an account for someone else in a professional capacity. Individuals who hold accounts for business purposes, such as a sole proprietorship, are not covered by the Act. Virtually all banks, savings institutions and credit unions, regardless of whether they are federally insured and whether federally or state chartered, are covered by the Act.

In provisions relevant to this repor(10)t, the Act requires a depository institution to deliver an account disclosure to a consumer either before an account is opened or a service is delivered, whichever is earlier, or whenever a consumer requests an account disclosure. If the request is not made in person on the institution's premises, then it must be mailed or delivered to the consumer within a reasonable time, defined as ten business days.

The disclosure must contain:


The Electronic Fund Transfer Act and its implementing regulations (Regulation E) governs all transactions that involve the electronic transfer of funds to and from consumer accounts held at financial institutions.(11) One of the requirements of Regulation E is that institutions disclose the terms of an electronic transfer, such as an ATM withdrawal, at the time a consumer obtains or is first provided with an EFT service.

The State of Minnesota currently requires federal and state chartered financial institutions to offer no-fee savings accounts to Minnesota consumers.(12) The state also regulates electronic funds transfers, prohibiting discrimination between financial institutions.(13)


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TERM DEFINITIONS

(All definitions are for purposes of this report.)

ATMs -- Automated Teller Machines are machines which dispense cash, accept deposits, transfer funds between accounts, and provide customers with account information. ATMs can be located at bank branches, retail establishments, and other private and public locations. ATMs can be owned by a bank, credit union, retailer or other entity, or can be leased by a bank to a retailer. An ATM allows a financial services consumer to access her or his account electronically, either at the customer's own institution or at a remote location. As described below, many ATMs owners and financial institutions charge one or more service fees for using an ATM.

ATM Networks -- ATMs are often owned or operated by networks -- collections of ATMs usually designated by a single, recognizable logo, which allow consumers to electronically connect to their own financial institution. Often ATM networks are owned by large banks, and the systems can be made available to customers of contracting small banks. For example, Norwest Bank owns the Instant Cash ATM system, however, Liberty State Bank customers can obtain Instant Cash ATM cards which will provide them access to all Instant Cash machines for free. (14) These interbank relationships are governed by private contract. Some ATM systems are not affiliated with large banks. National ATM networks, such as Plus or Cirrus, allow customers of banks that contract with these networks to obtain account information nationwide.

ATM "Foreign Use" Fees are charged to a customer by a financial institution for using an ATM which is not in that institution's network. For example, if a bank charging a foreign use fee owns only two ATM machines, and does not contract with a larger system, a customer would be charged a foreign use fee every time she or he used an ATM other than the two owned by the bank. A foreign use fee would not be disclosed at the time of the transaction, but would appear on the customer's periodic statement.

ATM Interchange Fees, are charged by an ATM network to the customer's bank or credit union, as compensation for providing the electronic transfer service. The network pays a portion of the interchange fee to the ATM owner, and keeps the remainder. The customer's bank can either absorb the cost of the interchange fee, or can pass this cost on to the customer by way of a foreign-use fee. The bank may charge a greater amount to the customer than the interchange fee, either for administrative reimbursement or for profit.

ATM "On-Us" Fees are charged by some banks and credit unions for using the institution's own ATM machines. An "on-us" fee would not be disclosed at the time of the transaction, but would appear on the customer's periodic statement.

ATM "Off-Us" Fees are the same as "foreign use" fees.

ATM Surcharges are imposed by the owner of an ATM for a withdrawal at the time of transaction. It is levied in addition to any foreign-use or on-us transaction fees imposed by a customer's own financial institution. Usually a surcharge will be announced and then recorded at the time of transaction on a customer's ATM receipt. For example, if a consumer makes an ATM withdrawal of $40.00 from a surcharging machine, the receipt might list the withdrawal as $40.00, a fee of $1.00, and the total withdrawal as $41.00.

Free Checking Accounts do not charge any monthly service fee or transaction cost, such as a per-check charge. The federal Truth in Savings Act prohibits a financial institution from using the word "free" when referring to an account in advertising if any such charges could be levied.

NOW Checking Accounts are accounts that charge interest. The interest may be variable or constant.

Regular Checking Accounts usually require a minimum or average balance be maintained in order to avoid a monthly service fee or transaction fees, but allow unlimited checking.

Value Checking Accounts, or "No-Frills" Accounts, usually have no minimum or average balance requirements, but charge a monthly fee. Value checking accounts may charge a per-check transaction fee.

Large Banks are those holding more than $1 billion in deposits. This includes First Bank, Norwest, TCF, and Firstar. Information about the deposit practices of Minnesota banks was obtained from the web site of the Federal Deposit Insurance Corporation, (www.fdic.gov). The FDIC figures were last updated by the agency on June 30, 1996. A total of seventeen large bank branches were surveyed: three branches of First Bank, four branches of Norwest, two branches of TCF, and five branches of Firstar. Although large banks claimed to charge the same fees regardless of location,(15) separate branches sometimes described differing fee structures in their literature. The disparity was due in part to the distribution of outdated fee brochures.

Small Banks are those holding $1 billion or less in deposits. MPIRG surveyed forty-three small banks, sometimes obtaining information from more than one branch of a small bank. Researchers surveyed five different branches of First American Bank, and two different branches of Premier Bank.

Credit Unions are not-for-profit, cooperatively owned financial institutions, in which members own shares of the entity. Consumers must meet certain qualifications in order to become members. There are currently 11,392 credit unions in the United States, of which 7,152 are federally chartered, and 4,240 are state chartered. (16) There are 206 credit unions in Minnesota.(17)

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SURVEY METHODOLOGY

The Bank Survey
The MPIRG bank survey was conducted in October and November of 1997 by trained MPIRG students and staff in eleven Minnesota counties, including the Twin Cities metropolitan area, the Duluth metropolitan area, St. Cloud, Rochester, and various areas in western Minnesota. Researchers visited banks and credit unions and asked for information about becoming a customer and opening a checking account. If not initially disclosed, surveyors were instructed to ask for literature describing available checking accounts and their costs, and to specifically ask for the institution's service fee schedule. In addition, surveyors asked bank representative a series of questions about bank policies, including ATM surcharging, maximum daily overdraft rates, and credit union membership requirements.

Calculation of Annual Costs
Annual costs of checking accounts were calculated by using a formula based on a study of consumer behavior produced by the American Banking Association.
(18) Although the formula is conservative in its assumptions, MPIRG has adopted it to maintain consistency, and allow for accurate comparisons with other consumer bank surveys.(19)

MPIRG's calculations assume the following:

The ATM Survey
The MPIRG ATM survey was conducted in October and November of 1997 by trained MPIRG students and staff. Surveyors were instructed to find ATMs that were not located in bank branches.

Surveyors looked first for a permanent warning sign stating that the ATM surcharged. If a warning sign was not visible, surveyors were instructed to insert their ATM cards, but only if the machine was not connected to the network affiliated with the surveyor's own bank. For example, if the surveyor banked at First Bank, and therefore had a Fastbank ATM card, the surveyor was told not to survey Fastbank ATM machines. The surveyor proceeded as if making a withdrawal, and recorded whether a temporary video screen warning was given, and at what point in the transaction.

If the surveyor had advanced to the "withdrawal amount" screen without a permanent or temporary warning, the surveyor was instructed to cancel the transaction to avoid a fee, and to record the action on the survey form. The report's calculation of surcharge rates is, therefore, based only upon surveyors' definite affirmative responses. "Don't know" responses were counted as "no." Thus, the surcharge rate in Minnesota is probably higher than this report shows.


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SURVEY RESULTS

MPIRG's 1997 survey included eighty financial institutions: fifteen credit unions, seventeen branches of four large banks, and forty-three small banks.
(21) At the same time, researchers surveyed 178 ATM machines not located at bank branches: ATMs in grocery stores, gas stations, and other retail and public establishments.
The survey, covering over thirty-five different types of service fees, four types of checking accounts, and ATM fee policies, reveals several consistent patterns. Generally, large banks charge more for maintaining a checking account, levy more and higher service fees, and always charge ATM foreign use fees and ATM surcharges. Credit unions generally charge less for accounts, service fees, and ATM fees, with small banks usually falling somewhere in the middle.

ATM FEES ON THE RISE

In the last four years, Minnesota consumers have seen a steep rise in fees charged for using their ATM cards at machines belonging to other banks or retailers.
(22) Some Minnesota customers are now paying to use their own banks' ATMs as well as paying penalties for withdrawals at machines not owned by their banks. According to the MPIRG survey, most Minnesota bank customers now pay a "foreign use" fee: an institution's charge against its own customer for withdrawing money from an ATM which the institution does not own. In addition, the ATM surcharge has recently gained great favor with owners of individual ATMs, whether banks or retailers. (23) Levied by the ATM owner at the time of transaction, the surcharge changes the structure of the ATM industry and charges consumers twice for each withdrawal made.

ATM Surcharges
ATM surcharging is a fast growing profit center for banks and retailers alike. In the most recent national ATM surveys conducted by USPIRG in September 1996 and March 1997, the rate of ATM surcharging steeply rises. In September 1996, twenty-three percent of ATMs surveyed nationally had a surcharge. By March 1997, forty-five percent of the ATMs surveyed nationally surcharged.
(24)

As early as July 1996, Congress heard concerns about the possible anti-competitive effect of ATM surcharges in testimony by Paul Green of the Community Bank League of New England:

We expect that community banks may experience significant erosion of their customer base, as well as in their deposits, if surcharges become the norm. Massachusetts is unique because three banks [Baybank, Bank of Boston, Fleet] own 61.7% of the 3,226 ATMs deployed in the state. It is not an understatement to say that in the worst case scenario, the dominance of in (sic) the area of ATMs by three entities could threaten the survival of the community banks in the state . . . Customer erosion would occur for two reasons. First, most consumers are smart enough to appreciate that if they move their deposit account from a bank with only a few ATMs to one with many more machines, in locations convenient to them, they can avoid a surcharge. Second, although many community banks have been absorbing interchange fees for their customers using foreign [off-us] ATMs, it is not only financially unfeasible for them to absorb both the interchange fee and the surcharge, but also it is impossible for the account holder's bank to ascertain the actual surcharge assessed.(25)

Minnesota's market, like Massachusetts', is dominated by three large banks: TCF, Norwest, and First Bank own fifty-three percent of the ATMs in the state, or 1419 of Minnesota's 2695 machines. The MPIRG survey found that large banks (including Firstar, as well as Norwest, First Bank, and TCF) surcharged one hundred percent of the time, at an average of $1.12 per withdrawal. Credit unions surcharged non-customers thirteen percent of the time at an average of $1.00, while small banks charged fifty-two percent of the time, at an average of $1.10.

ATM Surcharges and Foreign Use Fees
Minnesota, 1997
Percent Surcharging Average Surcharge Percent Charging Foreign Use Fee Average Foreign Use Fee

BIG BANKS

100% $1.12 100% $1.50

SMALL BANKS

52 1.10 79 1.17

ALL BANKS

65 1.11 85 1.27

CREDIT UNIONS

13 1.00 60 0.83

TOTAL

55 1.10 80 1.21

ATMs at NON-BANK LOCATIONS

83 1.05 N/A N/A
Source: 1997 MPIRG Bank and ATM Survey



In a separate survey, researchers polled 178 ATMs not located at bank branches, at locations that included gas stations, convenience stores, bars, casinos, grocery stores and public spaces like university student centers. Eighty-three percent of these ATMs surcharged, at an average rate of $1.05 per transaction.


ATM Foreign Use Fees
The ATM foreign use fee (or "off-us" charge) is charged to a customer by a financial institution for using an ATM that is not in that institution's network. For example, if a bank charging a foreign use fee owns only two ATM machines, and does not contract with a larger system, a customer would be charged a foreign use fee every time she or he used an ATM other than the two owned by the bank. This foreign use fee would not be disclosed at the time of the transaction, but would appear on the customer's periodic statement.

One reason banks charge customers a foreign use fee is to compensate for the cost of using an ATM network. Specifically, this is the price of the ATM interchange fee, assessed for every foreign ATM withdrawal. The interchange fee is charged by an ATM network or system to the customer's bank or credit union. Part of the interchange fee returns to the ATM owner and part is retained by the network. The customer's bank can either absorb the cost of the interchange fee, or can pass this cost on to the customer by way of a foreign-use fee. The bank may charge a greater amount to the customer than the interchange fee, either for administrative reimbursement or for profit.

MPIRG's survey found that in Minnesota eighty percent of financial institutions charge their customers a foreign use fee. (27) The average foreign use fee is $1.20. One hundred percent of large banks surveyed charge their customers for withdrawing money from a non-affiliated ATM, at an average of $1.50 per withdrawal. Only sixty percent of credit unions surveyed charge a foreign-use fee, averaging $.83 per withdrawal.

Total Cost of ATM Withdrawals
Because an ATM foreign use fee is disclosed in a customer's monthly bank statement, and an ATM surcharge is disclosed at the time of the transaction, many customers may not be aware that they are being charged twice for the same transaction. When the price of the "off-us" charge is combined with the surcharge, the total cost of making an ATM withdrawal from a foreign machine is quite high. For example, when a First Bank customer withdraws $20.00 from a TCF ATM, the total cost of First Bank's foreign use fee ($2.00) plus the TCF surcharge ($1.00) is $3.00, or fifteen percent of the withdrawal amount.




THE HIGH COST OF CHECKING ACCOUNTS

Regular Checking Account
For purposes of this report, a regular checking account has a monthly fee that can be waived by meeting a minimum or average balance requirement.

Annual Cost
According to MPIRG's survey, the cost of maintaining a regular checking account at a big bank was forty-six percent higher than at a credit union, and four percent higher than at a small bank. The average annual cost of maintaining a regular checking account in Minnesota is $114.49 Customers of big banks pay $135.24 a year on average, while small bank customers pay an average of $115.29 annually. Credit union members pay an average of $81.35 a year for a regular checking account.
Monthly Service Fees
The average monthly service fee for regular checking accounts surveyed in Minnesota is $5.98. Large banks charge an average of $8.75 every month, while small banks charge an average of $5.48 a month. Credit unions charge an average of $3.81 a month.

Maintenance Requirements
Fifty-nine percent of the financial institutions surveyed will waive the monthly service fee if a minimum balance is maintained. Six percent of the surveyed institutions waive the service fee if an average balance is met. Because a minimum balance must be met every day of the billing period, it is more difficult to maintain a minimum balance than an average balance, which is calculated monthly.

The average minimum balance for the large banks surveyed was $308.33; small banks charge $371.67, and credit unions charge $335.00 on average. For small banks waiving monthly fees based on a monthly average, the average requirement is $837.50 month. Credit unions on average waive fees if a $500 average balance is met.

Costs of a Regular Checking Account
Minnesota 1997

BIG BANKS

SMALL BANKS

CREDIT UNIONS

TOTAL

ANNUAL COST

$135.24 $115.29 $81.35 $114.49

MONTHLY FEE

8.75 5.48 3.81 5.98

MINIMUM BALANCE

308.33 371.67 335.00 351.60

AVERAGE BALANCE

N/A 837.50 500.00 770.00

PER CHECK CHARGE

0.30 0.23 0.23 0.23
Source: 1997 MPIRG Bank and ATM Survey



NOW Checking Account
A NOW checking account is an account which earns interest.

Annual Cost
According to MPIRG's survey, the cost of maintaining a NOW checking account at a big bank was sixty-six percent higher than at a credit union, and seventeen percent higher than at a small bank. The average annual cost of maintaining a NOW checking account in Minnesota is $143.97. Customers of big banks pay $161.53 a year on average, while small bank customers pay an average of $142.63. Credit union members pay an average of $104.69 a year for a NOW checking account.

Monthly Service Fees
The average monthly service fee for NOW checking accounts in Minnesota is $8.32. Large banks charge an average of $8.75 every month, while small banks charge an average of $8.06 a month. Credit unions charge an average of $6.24 a month.

Maintenance Requirements
Eighty percent of the financial institutions surveyed require customers with NOW accounts to maintain a minimum balance to avoid a monthly fee, with twelve percent requiring an average balance to avoid additional fees.

The NOW account minimum balance required by big banks in Minnesota was $655.88, while credit unions required a minimum balance of $560.00 to avoid a monthly fee. Small banks required a minimum balance of $852.38. On average the financial institutions surveyed required an average balance of $1110.00.

Costs of Regular Checking Account
Minnesota 1997

BIG BANKS

SMALL BANKS

CREDIT UNIONS

TOTAL

ANNUAL COST

$161.53 $142.63 $104.69 $143.97

MONTHLY FEE

8.75 8.06 6.24 8.32

MINIMUM BALANCE

655.88 852.38 560.00 777.34

AVERAGE BALANCE

N/A 1110.00 N/A 1110.00

PER CHECK CHARGE

0.30 0.25 N/A 0.25
Source: 1997 MPIRG Bank and ATM Survey



Value (or "No Frills") Checking Account
A value checking account is one that charges a monthly fee, regardless of the account's balance, and allows only limited check writing.

Annual Cost
According to MPIRG's survey, the cost of maintaining a value checking account at a big bank was fifty-four percent higher than at a credit union, and thirteen percent higher than at a small bank. The average annual cost of maintaining a value checking account is $102.62. Bank customers pay $105.90 a year on average, with customers of big banks paying $108.82, and small bank customers paying $104.78. Credit union members pay an average of $74.40 a year for a value checking account.

Monthly Service Fees
The average monthly service fee for value checking accounts at the surveyed institutions is $6.08. Big banks charge an average of $5.50 every month, while credit unions charge an average of $5.33 a month. Small banks charge an average of $6.36 every month.

Per Check Charges
Often value checking accounts limit the number of checks a customer can write during each billing period. The survey revealed that on average, value checking account holders were charged $0.31 for every check written. This charge was reduced to $0.25 per check at credit unions; big banks charged an average of $0.44 per check. Small banks charged $0.22 per check.

Costs of a Regular Checking Account
Minnesota 1997

BIG BANKS

SMALL BANKS

CREDIT UNIONS

TOTAL

ANNUAL COST

$108.82 $104.78 $74.40 $102.62

MONTHLY FEE

5.50 6.36 5.33 6.08

MINIMUM BALANCE

100.00 175.00 25.00 115.00

AVERAGE BALANCE

N/A 5 N/A 5

PER CHECK CHARGE

0.44 0.22 0.25 0.31
Source: 1997 MPIRG Bank and ATM Survey



Free Checking
Forty-one percent of the institutions offer "free" checking accounts. These accounts require no minimum or average balances, monthly fees, or transaction fees. However, Free Checking Account-holders are still subject to service fees such as bounced check penalties and ATM withdrawals. Using the same formula that was used for the accounts discussed above, the annual cost of "free" checking for large banks surveyed is $34.14, $31.66 for small banks, and $22.50 for credit unions.

SERVICE FEES: MORE, MORE OFTEN, AND MORE EXPENSIVE

Along with increasing costs of maintaining a checking account and steeply rising ATM withdrawal penalties, banks are increasing and adding to fees charged for other services. In 1990, an industry report recorded 96 different types of fees in a national survey; by 1994, that number increased to 250 types of fees.
(28) MPIRG's survey tracks thirty-five different types of fees.


Service fees are a rising source of revenue and profits for banks. Since 1989, income from fees has risen almost seventy percent. Fee revenue nationally totaled $9.4 billion in 1988, $10.3 billion in 1989, $11.4 billion in 1990, $12.8 billion in 1991, $14 billion in 1992, $14.9 billion in 1993, $15.3 billion in 1994, $16.05 billion in 1995, and $16.9 billion in 1996.
(29)

Locally, large banks have also increased their income from service fees. Norwest's fee income rose one hundred ten percent from 1991 to 1996, to $330 million. TCF's fee income rose ninety five percent during the same time, to $86 million a year.(30)


Bounced Check Fee
Financial institutions charge customers for writing checks against insufficient funds. Customers are also charged for overdrawing an account, even if the check is paid. In most cases, the banks surveyed charged the same fee for both overdrawn accounts and returned checks for insufficient funds.

Many consumers believe the bounced check fee they pay is to reimburse the bank for the cost of a bounced check, but bounced check fees at the surveyed banks far exceed the cost of a bounced check, even accounting for a reasonable increase to deter rampant bad check writing. More than 99.9 percent of all bounced checks clear the bank a second or third time(31), limiting the losses suffered by banks. According to the Center for the Study of Responsive Law, the total cost of a bounced check to a bank is only $2.68, as outlined below(32):


$1.32 - Administrative costs per bounced check
$1.36 - Losses from check fraud per bounced check

$2.68 Total costs to bank

A comparison of cost to fee shows that some banks are levying bounced check penalties at almost nine hundred percent above the costs incurred. In most cases, this fee will be charged to a customer multiple times if several checks fail to clear in a day.(33) Some banks even cash larger checks before small checks, increasing the likelihood a customer will empty the account before all the day's checks have cleared. (34)In an article in the American Banker newspaper entitled "Customers Accept Higher Fees when Banks Use a Little Finesse," a small bank manager advises his colleagues that since he began using the "hi/lo" check cashing policy, income at the small bank increased over $80,000 a year.(35)

The bounced check fee mark-up falls disproportionately on low income and senior customers. A study reported in the MidAtlantic Journal of Business in 1993 revealed that 33% of study participants earning less than $20,000 a year had bounced a check, while only 24.5% of participants earning more than $20,000 a year had bounced checks. Of survey participants 56 years or older, 72% had bounced a check, while only 26% of people under the age of 56 had.(36)

MPIRG's survey found that big banks in Minnesota charge an average of $21.65 for a bounced check. (37) Credit unions charge significantly less, at $15.63 per bounced check.(38) Small banks on average charge customers $18.08 for a bounced check. (39) This compares to the national average of $20.91 for large banks (up seven percent from 1995) and $20.35 for small banks (also up seven percent from 1995).(40)

Bounced check charges are rising steeply in Minnesota, according to MPIRG's survey, some by as much as one hundred percent over the last four years. The chart at Appendix B documents this rise.

Deposit Item Return (DIR) Fee
Financial institutions charge their customers a DIR fee for depositing someone else's check which then bounces. The penalty is assessed even though the customer is faultless, and the guilty party will inevitably be charged a bounced check fee by its own financial institution. Of the banks surveyed by MPIRG, the average DIR charge is $3.83. One hundred percent of the large banks surveyed charge a DIR fee, seventy-seven percent of small banks surveyed charge the fee, and sixty-seven percent of credit unions surveyed charge the fee.

Closing Fee
Seventy-one percent of large banks surveyed charge a fee for closing an account in less than a year. The average large bank closing fee is $11.67. Forty percent of small banks charge a closing fee, at an average of $11.84. Only one of the surveyed credit unions charged a closing fee, which was $5.00. Closing fees often were as high as $20.00.

A closing fee discourages a customer from switching deposits to another bank, which may impact the competitive nature of the market. In addition, closing fees have a disproportionate impact on individuals who are more likely to move, like students. While large banks argue for decreased government regulation and laud the competitive pressures of the market, the high use of account closing fees raises concerns about declining competition.

Account Research Fee
Another disturbing trend in the Minnesota financial services market is the high price of information. Ninety-nine percent of the banks surveyed charged an hourly fee for research assistance on a customer's account, usually requiring payment for a minimum of one hour. Large banks charge customers an average of $24.71 an hour for account research, while small banks charge an average of $21.38 and hour. Of the credit unions surveyed, seventy-three percent stated that they charge for account research an average of $15.91 an hour.

In addition, a bank or credit union customer often must pay to obtain an account statement, a copy of a check or deposit, or a mini-statement from an ATM. Banks are now also charging for telephone inquiries, telephone transfers, and contact with a human teller.


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FEE DISCLOSURES CONFUSING AND INCOMPLETE

The federal Truth in Savings Act mandates certain disclosures be made available to consumers of financial services. The Act requires banks and credit unions to provide written statements of all service fees that might be charged to account holders and the conditions under which fees might be charged. The information must be provided immediately upon personal request at the institution's premises.
(41)

To conduct this survey, MPIRG researchers visited the branch offices of financial institutions and asked for all information available related to opening a checking account at the bank. Many banks did not provide service fee brochures on first request. Researchers then asked specifically for the institution's service fee schedule. Many bank employees were able to comply with this request immediately, but a significant number were not sure if their institution had a fee brochure, or where it would be located, and a manager had to be asked for assistance. At least two institutions surveyed refused to provide written information when asked for the fee brochure.

The fee schedules provided were often incomplete and confusing. Because the federal government does not require banks to use standardized language in fee schedules, comparing charges at different banks is difficult. Fee brochures are often written in what appears to be a haphazard and confusing way, and fees are sometimes listed in two or even three different brochures.

Some banks and credit unions fail to list fees that apply to their customers. When researchers asked bank employees specifically about the price of certain services, they were frequently given prices that were either not listed in the written materials or were higher than advertised.

Finally, many banks gave out old and conflicting disclosures, some as much as seven years out of date. For example, a number of banks provided a recent list of checking account costs, along with an older fee schedule with prices that differed from the checking account brochure. Different branches of large statewide banks sometimes gave researchers different schedules at different locations, even though bank managers insisted that their large bank charged the same fees at all branches.

The absence of regularity in disclosure requirements, and the confusing and often burdensome way brochures are designed, can prevent customers from becoming fully informed about bank services and associated costs. Consumers cannot make informed choices in such a market, and are unable to knowledgeably monitor bank management of their money.


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RECOMMENDATIONS FOR THE LEGISLATURE

ENACT THE LIFELINE CECKING ACCOUNT LAW
A Lifeline Checking Account is one with low fees and fee caps. Minnesota currently requires a mandatory low cost savings account be offered at all federal and state chartered financial institutions. MPIRG advocates the expansion of that law to include low cost checking accounts as well. Lifeline Account legislation would require all banks holding state funds to offer low cost accounts. In a bill introduced in the Minnesota legislature in 1997, qualifying banks would have to provide Lifeline Accounts with low monthly fees and bounced check fees, and would be required to cash government checks for free.
(42)

As financial services become less a luxury and more a necessity, low income consumers must have low cost options to choose from. Requiring all Minnesota depositories to offer Lifeline Checking Accounts is an equitable way to ensure access for everyone, regardless of income. Because depository banks are benefiting from the use of state funds, requiring this service is neither burdensome nor unfair.

BAN ATM SURCHARGING
Surcharging is unnecessary and anti-competitive. ATM owners already are recompensed for non-customer transactions through the interchange fee. Large bank ownership of a growing majority of Minnesota ATM machines, and the large banks' policy of surcharging all non-customers at a high rate pressures customers of small banks and credit unions to transfer their funds. A surcharge ban would even the playing field, and allow all financial institutions to compete fairly in the marketplace.

Currently two states, Iowa and Connecticut, prohibit ATM surcharging by mandate of their Commissioners of Commerce. Mississippi limits fees to $2 and Wyoming limits fees to $1.(43) Alabama, California, and Tennessee provide protection for consumers by requiring banks to post notice of the fees involved in an ATM transaction. (44) Approximately seventy bills relating to ATM surcharges have been introduced in state legislatures over the last two years. (45) In addition, Senator D'Amato from New York, the Chair of the Senate Banking Committee, has introduced and held hearings on federal legislation to ban ATM surcharging in the last two Congressional sessions.(46)
Four bills banning surcharges were introduced in the Minnesota legislature in the 1997 session.(47)

REQUIRE STANDARDIZED DISCLOSURE LANGUAGE
The federal Truth in Savings Act requires financial institutions to disclose certain kinds of information about service fees and account costs. However, the Act does not require that the disclosures be made using standardized language, or in the same format. Mandating this standardization would give consumers accurate and easily accessible information with which to make informed choices.


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RECOMMENDATIONS FOR CONSUMERS

Consumers also have a responsibility to monitor the cost of the financial services provided to them and to make informed choices about where, and how, they will deposit their money. In addition to contacting legislators about the consumer friendly laws described above, consumers should also keep the following recommendations in mind:




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APPENDIX A



Source: Federal Deposit Insurance Corporation


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APPENDIX B



Bounced Check Fees on the Rise
Minnesota 1997
Bank 1993 1995 1997 Percent Change
Norwest Bank 20 21 21 5%
First Bank 18 21 21 17
TCF Bank 21 22 24 14
Firstar Bank 18 21 25(49) 39
Marquette Bank 15 19 21 40
National City Bank 17 21 21 24
Midway National Bank 20 20 20 0
Richfield Bank & Trust 15 20 21 40
Eastern Heights Savings Bank 10 15 20(50) 100
Liberty Savings Bank na 20 20 0
Western State Bank na 20 20 0
Cherokee State Bank na 19 20 5
Riverside Bank na 18 20 11
Norwest Bank na 19 19 0
Source: ACORN, 1997 MPIRG Bank and ATM Survey




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