Some Bank Fees Are Immoral, Others Are Merely Annoying

There are plenty of examples of manipulative and unreasonable fees charged by banks. But some banking fees are merely annoying, as much as consumers might like to argue otherwise.

The Boston Globe reported last week that fees to close a bank account are one of the newest areas of consumer, lawmaker and regulatory scrutiny. The article details the closed-account fees at several major banks that do business in Massachusetts – including U.S. Bancorp, PNC, Sovereign and Citi.

What I found striking, however, is that at all four of those banks, along with People’s Bank, a Connecticut institution with branches in Boston, the fees are applicable only in the first few months of opening an account. The banks mentioned in the article charge $20 or $25 if a consumer closes the account in the first 90 or 180 days.

It's hard for me to get up in arms about this in light of some of the alleged bank practices being investigated or prosecuted. Really, how many consumers need to suddenly close out an account so soon after opening it?

The Globe article quotes the chief executive of a Wisconsin credit union as saying that no customer has ever closed an account quickly enough to incur the $50 fee levied for closing a premium account within 90 days. Lumping in this sort of fee with some of the true consumer abuses out there simply muddies the waters.

There are public image concerns with any sort of bank fee, especially after the short-lived Bank of America Corp. $5 debit card fee, which became the third rail of consumer banking this fall before it was retracted.

"These basic bank functions and transactions -- if you try to a la carte price them, it really peeves the consumer and causes them to feel banks are untrustworthy," says Mike Branton, a managing partner with consultancy Strategy Corps LLC. Sentiment can spread rapidly. "There’s an unbelievably easy forum out there with social media to tell people you just got ripped off by your bank."

I’ve heard several people liken the closed account fee to the ever-infamous luggage fees many airlines charge now. But I actually see it as more akin to the penalty when you break your apartment lease early or cancel a gym membership. It’s a deterrent against making commitments without thinking them through. There are back-end costs to a business for each account opened and closed (or apartment taken and vacated). The power of the fee comes from the annoyance factor.

Mike Moebs of Moebs Services Inc. estimates that the cost to close an account probably ranges from $3 to $5 for most standard accounts, up to as much as $24 for a complicated, interest-bearing checking account at a large institution that includes bill payment services. He says he’s seen closed-account fees range from $1 to $100, clearly dwarfing any costs incurred.

Moebs notes that the fee is relatively uncommon, estimating that 3% to 5% of financial institutions have account closing fees – though that number is likely up from about 2% of institutions before 2008. And the practice is seen more at the larger banks, which he says have higher cost structures overall.

Like Branton, Moebs argues that the fees alienate consumers and that a loss of goodwill could cost the banks more than they recoup from an account closing fee. "It’s a penalty fee and nobody wants to be penalized," says Moebs.

But I’d argue that just because people don’t want to be penalized doesn’t mean there’s an inherent problem with the fee itself. Raise your hand if you’ve ever been indignant after getting a speeding ticket, even if you deserved it.

A closed account fee should be made unmistakably clear to the consumer – much like the speed limit should be clearly marked for drivers. The Globe article highlights inroads the Pew Charitable Trusts has been making in pushing for more straightforward disclosures on all bank fees. This seems like an easy way to garner consumer trust.

Moebs also makes what might be the most convincing argument against the fees, which is the pragmatic one: Yes, there are some consumers who would just close the account for a fee, perhaps griping along the way. But there are others who would more likely take out all but $2 from the account (depending on whether there was a minimum balance requirement or inactive account fee) and wait out the penalty period.

"The thing that the banker doesn’t want is to keep this account open," says Moebs, adding the bank would certainly lose money to maintain such a low-dollar account.

If the money went unclaimed long enough, the bank would also have to contend with state escheat laws requiring it hand the money over to the state, he says. Moreover, all too often "this inactive account is the home of the dishonorable employee" who can use it to embezzle funds, Moebs adds.

The closed-account fee isn’t a regular charge or even one that is likely to hit most consumers. Sure, it’s worth pushing your bank to have the fee waived if you can, especially if there are extenuating circumstances. But sometimes you’ve just got to bite the bullet if you choose to do something that you knew going in would incur a nuisance fee.

Banks have done plenty of things to consumers we should be outraged about. Let’s not turn a fairly innocuous, cut-and-dried fee into something it’s not.

Victoria Finkle is a reporter covering consumer finance for American Banker. The views expressed are her own.