Remember that Credit CARD Act passed last year? It limited the fees that credit card companies could charge and introduced dozens of other reforms designed to protect the consumer from being taken advantage of by the big, bad, banks. As it turns out, there are plenty of loopholes, the first and most obvious was that many of the provisions didn’t go into effect into a few months later. So credit card companies immediately raised interest rates to offset some of the losses they would see with the new regulations. Funny that no one saw that coming.

Well there are some other regulations in there. Turns out the banks can’t charge a bunch of fees for people that overdraft on checking accounts anymore. And banks don’t want to take a hit on profits. Let me explain a bit how banks make money.

All companies have 3 sources of capital. That is, they can get money to finance operations that generate profits from 3 sources. They can borrow it, they can raise money from investors, or if they’ve got cash on hand they can use that. Banks have another option. They use deposits from customers. Cash on hand is difficult to use, so borrowing money or getting cash from investors is the best way. But that’s expensive. Debt might require a return of 5-10%, and equity requires even more. How much do banks pay on deposits? Depending on the kind of account, these days it’s around 1% or less. It’s nothing if you have a checking account that doesn’t pay interest. Banks use checking accounts to draw in customers to sell them all the other products they have. They are limited on what they can do with the money in checking accounts, so they can actually lose money on them.

This is especially true when you break the rules by overdrafting on your account. Banks originally introduced the fees to deter you from overdraft. Call it “punishment” or “consequences”, but banks eventually learned it could be a source of profit. So fees got jacked up and then regulated away.

To make a long story short, your free checking account is not long for this world. Banks have to make up for the lost revenue from those overdraft fees, and they’re going to start collecting “maintenance fees” and other kinds of fees. The way I see it, customers that used to break the rules and were charged for it now get a break. Customers that followed the rules and got to enjoy the benefits of such now have to help pad the pockets of big bank shareholders.

I don’t blame the banks for doing this, they have to do right by their shareholders and they’re playing along with the rules the Congress laid out for them. You can’t regulate away profits and expect companies to just sit there and take it. Thanks Congress.

For a slightly different opinion check out this post.

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categories: banking, business, government, personal finance