How Industry Is Dealing with FDIC Fee Hike
When deposit-insurance premiums rose by 92%, banks were faced with a classic dilemma: Should they pass the increase on to consumers and risk defections? Or should they eat the expense and further depress profits?
Based on a series of interviews last week, many institutions have decided on the latter. Bankers say they expect retail customers to bear only about 20% of the increased costs. And, even then, higher fees aren't being explicitly tied to the premiums.
To the degree that expenses are being passed on, consumers are seeing higher fees on checking accounts and lower interest rates on savings products.
Bankers are confident that consumers will view these changes as byproducts of a poor economy. If the price boosts were tied directly to increased Federal Deposit Insurance Corp. premiums, customers might feel they are paying for the banking industry's mistakes.
A small group of banks, however, have taken a more candid approach.
Union Planters' Frankness
On May 1, Union Planters National Bank informed customers they would collect interest on only 88% of the balances in their checking accounts as a result of the premium boost. It also increased its basic checking fee to $7 from $6 and reduced its passbook savings rate to 4.25% from 5%.
"Consumers must understand that banks have to do something to offset the tremendous cost of increasing FDIC premiums," said Benjamin Price, senior vice president at Union Planters.
Another Jolt in July
On July 1, the FDIC raised its premium to 23 cents for every $100 of insured deposits, up from 19.5 cents six months earlier and 12 cents one year ago.
Like Union Planters, a number of other southeastern banks - including C&S/Sovran Corp.'s Sovran Bank in Richmond, Va., and Barnett Bank in Jacksonville, Fla. - have openly tapped their customers for at least part of the cost increase.
Their aggressive stance brought criticism from the local press. But Union Planters' Mr. Price, for one, said business was ultimately not hurt.
Most bankers said they do not dare to pass along the costs of the premium rise directly. And for the time being, most say, they will bear most of the burden of the higher premiums.
"Banks would love to be able to pass through the fees, but competition is such that I don't think there is much hope for that," said Robert Freeman, chairman of Signet Banking Corp., Richmond, Va. "Over time, you may see interest on savings fall to less than they might have been, but I wouldn't bet on it."
Corporate customers have long paid FDIC premium assessments to help banks offset insurance payments. But the retail market is not likely to tolerate a similar charge.
"We're in a new phase of consumerism in banking with a lot of significant groups reacting to things like high credit card rates and low deposit rates," said Kenneth Thomas, a Miami-based banking consultant.
Most consumer bankers are attempting to compensate for the FDIC hikes by shaving operational costs. But they frustratingly acknowledge that scrimping will not be enough.
"[Y]ou can only go so far with cost control," said William H. Brandon, president of the First National Bank of Helena, Ark. "At a certain point, it is going to offset your ability to serve your customer."
Mr. Brandon estimated that the July 1 FDIC premium hike will cost his bank some $120,000 before yearend. He estimated that half of that will be recovered through lower labor costs and stingier contributions to charities. The rest, he sighed, will come directly from the bank's bottom line.
"Where can you knock that off noninterest expenses?" he asked. "You can't take it off your deposit rates because you will lose your core deposits."
With interest on many savings accounts already down around the 4% mark, banks cannot risk inciting the wrath of proconsumer legislators in Washington as Congress debates the future of bank reform, Mr. Thomas said.
"It just doesn't make sense for the industry to jump into a new fee right now," he said, adding that nobody wants to attract criticism from Congress.
Banks have long had the option of imposing an "88% rule" on interest-bearing checking deposits. That is because regulators require them to keep a cash reserve that does not earn interest on 12% of their customers' checking balances. It was not until the latest premium increases, however, that banks started using the option.
"Timing is really everything," Union Planter's Mr. Price said. "Market conditions made it the right time to lower liability rates, which we wouldn't have been able to do in a different market rate environment. That was critically important."
Consumers React to Labeling
Mr. Price added that after the initial wave of resistance, most customers accepted the increase. "How you label this is very important," he said. "People didn't perceive it to be a fee."
When its new pricing policies took effect, Union Planters also embarked on a large internal campaign to educate employees on how to explain the changes. Tellers were told to use the analogy of premiums consumers themselves pay for home, car, and life insurance.
"When you get into this type of environment, you have to educate your own people because they are the ones that have to explain it to your customers," Mr. Price said.
Mr. Thomas agrees with the strategy.
"Customers will accept a cost they can relate to," the consultant said.
Mr. Price said the bank still has not passed everything along to consumers.
"We would hope to eventually offset all of the cost increase but you just don't know how it is going to come out until years after you've done it," he said in explaining the bank's caution.