Bankers are often accused of creating vague terms for various fees, yet a recent regulatory directive could add another ambiguous term to the list.
The Federal Deposit Insurance Corp. last week instructed banks to remove the agency's name from a deposit insurance-related cost that is often passed to business clients. Some banks have charged this FDIC fee for more than a decade, but most began passing it on as insurance assessments climbed in recent years.
The FDIC spoke out against the common practice after it was inundated with complaints from depositors. Still, there are bankers, and even clients, who are worried that a nameless fee could be more confusing and potentially more costly.
"It could lead to the fear or assumption that the charges become hidden because the banks are not allowed to say 'FDIC' or they call it by a name that's not clearly understood," says Alvin Rodack, senior director of financial services at The Ohio State University. "What's the saying … hiding in plain sight?"
Financial executives have long since accepted the assessment-related fee as a way of life. So the FDIC warning caught many bankers off guard.
"We have a line-item labeled 'FDIC insurance.' It's been that way for 10 years," says Thomas Kasanders, executive vice president of business banking at Washington Federal (WAFD) in Seattle. "I was surprised there was an issue of sensitivity" for the FDIC.
The FDIC is aware that some banks have passed such insurance costs onto commercial clients as far back as the 1990s. Between 1996 and 2008, few banks paid insurance assessments because the deposit insurance fund was sufficient. After the FDIC was authorized to issue assessments to all banks in 2007, depositor complaints began pouring in.
In the first quarter, assessment fees reached their highest point since mid-2009, totaling $3.7 billion. It is unclear how much of that was passed on to depositors.
"We had a number of depositors call up saying they were told by banks to contact the FDIC" to explain the fee, says Kathleen Nagle, associate director for consumer protection in the FDIC's Division of Supervision and Consumer Protection. "We've also received some complaints where the depositors objected to the fee amount."
The FDIC is worried that some depositors could interpret some fee disclosures as a "pass through" requirement from the FDIC. Because an assessment is based on a bank's risk, fee disclosure could potentially reveal a bank's regulatory risk-rating.
"We'll continue to monitor how fees are described and discourage any inappropriate characterizations," says Luke Brown, associate director for supervisory policy in the FDIC's Division of Depositor and Consumer Protection. "To the extent we find concerns with a particular bank, we will have a dialogue with them."
Banks are limited in the amount of detail they can give about the fee rate, which can create problems for clients that want explanations for every charge. With assessments and deposits increasing lately, the fee is a line item that sticks out sorely.
"People are actually looking at their statement to see all of the service charges and, a lot of times, they don't understand it," says Sheila Yosufy, a senior commercial service executive at Cardinal Bank in McLean, Va., which does not charge an insurance fee. The bank is a unit of Cardinal Financial (CFNL).
"We review their full relationship at other financial intuitions and we tell them line by line, 'this is exactly what you're paying for," Yosufy says. "It's literally an eye-opener for them."
Some clients say they have a hard time trying to compare the assessment fee at various banks.
"Each bank has a slightly different charge," says Tom Hunt, the director of treasury services at the Association for Financial Professionals in Bethesda, Md.
"It's a growing fee, but it's even more complex than that," Hunt says. "It is hard to figure out how does this relate to each bank."
Hunt's group has created more than 2,500 codes for each charge and line-item generated from U.S. bank statements.
"It is clearly a cost of doing business and an increased cost of doing business at banks," Kasanders says.
There are also clients who have accepted the fee as a way of life. "Most people don't understand that when you're a corporation, banks charge you for just about everything," Rodack says.
"I can understand the FDIC's point but, at same time, this has been going on for years, and we all understand it," Rodack adds. "Our banks didn't try to say they had to do this. We understood that they chose to do it."