Why are Bank of America and other large US banks increasing fees for the use of debit cards and other services?

The short answer is regulation. The Fed’s low interest rate policy has a big effect on how banks price all services. Specific to ATM fees, Congress has decided to regulate the fees charged to vendors by banks on electronic transactions, essentially cutting this profit center in half for the largest banks that have $10 billion or more in assets. This fee is still far more than the actual cost to the bank providing the service, but such is life in America’s less-than-free market. Like airlines, the “too-big-to-fail” (TBTF) banks are not really profitable, thus pricing of one product is often skewed to make up for shortfalls in another.

When you look at the TBTF banks, which dominate the industry in the U.S. today, all of them feature business models where monopoly pricing power and the much abused free market operates. The reasons for this are complex, but the power of the TBTF banks – Bank of America, JPMorgan, Wells Fargo and Citigroup – largely stems from the fact that they remain heavily regulated and protected by these same captured regulators led by the Fed. Thus there is no competition for the services these large banks provide.

Despite the gazillions of words written about deregulation in the financial services industry, there is the Bank Holding Company Act of 1956, which provides the Fed with the power to regulate companies that own banks and thus it protects the TBTF institutions from competition. If Google, Wal-Mart and Amazon were permitted to own banks and thereby compete with Bank America et al in the electronic payments business, the cost of electronic payments to small vendors and consumers would plummet.

The fact that the Dodd-Frank legislation mandates some artificial relief for consumers and small businesses is lovely, but the real solution to the problem of the TBTF banks and their monopoly pricing power regarding electronic payments is competition. As former Fed of New York general counsel and White & Case partner Ernest Patrikis told me in a 2008 interview:

What is the rational for the Bank Holding Company Act and thereby making it more difficult for companies to acquire control of banks? I’ll give you two rationales. First is the Fed continues to believe in the separation between backing and commerce, something for which I do not have a lot of respect. Citicorp’s becoming a one-bank holding company and thereby gaining the ability to engage in all sorts of non-bank services was one prime motivation for amendments to the Bank Holding Company Act in 1968.

Which lead me to then ask Patrikis: Well, aren’t we done with the 19th Century? Isn’t Glass-Steagall over and done with? His reply:

No, not really. We still have the Bank Holding Company Act. While Gramm-Leach-Bliley greatly broadened the activities permissible for bank holding companies, it has not been entirely eliminated. Few countries in the world have limitations like that, maybe Japan. Most countries do not impose activity limitations on companies controlling banks. With limitations on transactions between banks and controlling persons, is that limitation necessary?

Much of what banks do today is not special and does require the vast protective apparatus of the Fed and other regulators, but these same regulators also protect the zombie banks from competition. While protecting deposits and other payment system functions is important, these safeguards exist today and would continue tomorrow if Wal-Mart, for example, were allowed to proceed with its wish to operate a bank. But how about Amazon or Google?

While the US banking industry has been successful so far in coercing the FDIC not to process applications by commercial firms to operate near-bank industrial loan companies allowed by some states, the rising consumer uproar over fees for ATM transactions and other services illustrates why we need to repeal the Bank Holding Company Act.

My friend Yves Smith, proprietor of Naked Capitalism, urged readers that use Bank of America to “take their revenge. Move your accounts to a small bank. Cancel your Bank of America credit cards. And be sure to let a bank customer services rep know exactly why you are done with them.”

I have a better idea: Open up the TBTF banks to competition. That will make the TBTF banks a lot smaller. And the regional and community banks will do just fine in this environment. The truth is that smaller institutions are better at underwriting credit and providing consumers with relevant, reliable services. Give them cheaper, more modern tools and services, and smaller banks will actually thrive.

Open up the US banking industry to less expensive transaction processing and other back end services that will come with deregulation of these industries and smaller lenders and agencies will do just fine. Annihilate the TBTF bank cartel in payments and the systemic risk problem will, to use the Marxist-Leninist term, “wither away”.