Understanding the Cost of Fee Income

There is a common denominator to the leading issues on the compliance front burner. The issues are all point generated by concerns that consumers may not be treated fairly. In short, the common denominator is unfairness or deception in banking products.

Look at the most recent publications from the agencies - and your recent issues of Compliance Action. In case you don't have them handy, topics have included payday lending, bounce protection and other interesting overdraft program developments, predatory lending practices, and unfair or deceptive acts or practices.

The common denominator is fairness. Financial institutions are held to certain (high) standards of fairness in conducting business with customers. Banks do not do business in an environment of "let the buyer beware." Let other industries be smeared with the tar of a reputation for taking advantage of gullible customers. Financial institutions may not join their company.

Instead, financial institutions are held to a high standard of ethics and customer service. Banks and thrifts are required to serve their communities' financial needs and to prove that they do so. They must give clear and conspicuous disclosures. And, of course, these disclosures must be accurate and tell the whole truth.

On top of this, financial institutions don't have totally free choice in where they locate their places of business. Locations must be approved by their regulators and consumers usually have some say in the process. And locations there must be - bricks and mortar.

We put up with all this because banks are special. When a business is in the business of handling other people's money, the stakes are higher than when the business is selling t-shirts. If a consumer buys a t-shirt that loses its color in the wash, the consumer may try to return the shirt, or complain, or simply throw it away. But it is an entirely different matter when the consumer's money is involved. When it is the consumer's money, exchanges don't work and complaints may not be satisfactory. And neither is simply walking away. If a bank lost your money, would you walk away saying you won't take your business there again? No. You would stay and challenge them until they found it.

When it comes to handling other people's money, the stakes are simply higher. The business is visible, and the expectations are for total honesty and fairness. Enter unfair and deceptive acts or practices. The very concept of unfairness and deception flies in the face of what customers expect from financial institutions. And that is why the topic is so sensitive. But what suddenly put this on the front burner?

Unfair or deceptive practices made it to the front burner because financial institutions put them there. When a business pays more attention to turning a profit than to customer service, there is slippage in customer service. If the profit managers in the organization focus on new ways to make money without simultaneously considering what additional value customers get for the new cost, the profit managers risk stepping into the unfair and deceptive zone.

The clearest example of this process is the wide popularity of bounce protection. A shocking number of banks have implemented bounce protection, blinded by the promise of increased fee income. But it seems that those deciding to implement bounce protection have not stopped to consider what additional value their customers are getting for the privilege of paying those new fees.

Bounce protection and other clever ideas to generate fee income have simply called everyone's attention to "those nasty bankers." The increase in fees makes consumers mad. And when they are mad, they complain. Enter compliance. And more compliance. The bottom line, after all the profit is counted, is that financial institutions must consider what value they provide for the fees they charge.

Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 5, 4/05