Financial Regulatory Forum

from Christopher Whalen:

The cure for higher ATM fees is competition

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:

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