tag:theconversation.com,2011:/uk/topics/bank-fees-8256/articlesbank fees – The Conversation2021-07-27T12:03:54Ztag:theconversation.com,2011:article/1646892021-07-27T12:03:54Z2021-07-27T12:03:54ZBiden wants to crack down on bank mergers – here’s why that could help consumers and the economy<figure><img src="https://images.theconversation.com/files/413186/original/file-20210726-17-1g3n052.jpg?ixlib=rb-1.1.0&rect=278%2C772%2C4850%2C3215&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Biden directed regulators to find ways to limit bank mergers. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/410c156f74ae44cfb3bc7be86b968cc8/photo?Query=biden&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=55817&currentItemNo=224">AP Photo/Andrew Harnik</a></span></figcaption></figure><p>President <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/">Joe Biden signed a sweeping executive order</a> on July 9, 2021, that aims to increase competition throughout the U.S. economy. In one of the order’s <a href="https://www.reuters.com/business/exclusive-white-house-target-bank-mergers-financial-data-with-competition-order-2021-07-09/">most significant provisions</a>, he directed federal regulators to strengthen oversight of bank mergers.</p>
<p>As a <a href="https://michiganross.umich.edu/faculty-research/faculty/jeremy-kress">former Federal Reserve attorney who is now a business law professor</a>, I <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/">share Biden’s concern</a> that widespread bank consolidation has hurt consumers and the broader economy.</p>
<p>If your bank has been acquired by a larger financial institution, you may have noticed that it is now <a href="https://www.doi.org/10.1111/j.1540-6261.2006.00847.x">harder for you to obtain a mortgage or a car loan</a> or you may be <a href="https://www.doi.org/10.1111/1467-6451.00082">earning less interest in your savings account</a> and <a href="https://scholar.harvard.edu/vbord/publications/bank-consolidation-and-financial-inclusion-adverse-effects-bank-mergers">paying higher transaction fees</a>. </p>
<p>Biden’s executive <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/">order aims to reverse</a> these troubling trends. But with the <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/bank-m-a-2021-deal-tracker-june-hits-highest-monthly-total-since-2019-62489908">pace of bank mergers accelerating</a> as the economy recovers from the coronavirus pandemic, putting the brakes on harmful consolidation will not be easy.</p>
<h2>3 waves of mergers</h2>
<p>From 1934 until the 1980s, the U.S. banking system consisted of <a href="https://banks.data.fdic.gov/explore/historical?displayFields=STNAME%2CTOTAL%2CBRANCHES%2CNew_Char&selectedEndDate=2020&selectedReport=CBS&selectedStartDate=1934&selectedStates=0&sortField=YEAR&sortOrder=desc">more than 18,000</a> primarily small depository institutions. </p>
<p>Today, however, the number of banks in the United States has plummeted to <a href="https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2021mar/qbp.pdf#page=1">fewer than 5,000</a>, while <a href="https://www.cnbc.com/2015/04/15/5-biggest-banks-now-own-almost-half-the-industry.html">concentration among the largest lenders has reached record levels</a>. The top four banks – JPMorgan, Bank of America, Wells Fargo and Citibank – <a href="https://www.federalreserve.gov/releases/lbr/current/">hold the same amount of assets</a> as the next 300 combined, about US$9 trillion. </p>
<p>Three distinct waves of bank mergers have contributed to the rapid consolidation of the U.S. banking sector. </p>
<p>First, <a href="https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci1-2.html">in the 1980s and 1990s, policymakers repealed</a> longstanding geographic restrictions that had limited banks to operating within a single state. Once banks were allowed to expand across state lines, many <a href="https://www.doi.org/10.1007/BF02295035">merged with lenders in neighboring states</a>, creating a cohort of larger, regional banks. </p>
<p>Next, banks began to grow not only in size, but also in scope. In 1999, the <a href="https://www.govinfo.gov/content/pkg/PLAW-106publ102/pdf/PLAW-106publ102.pdf">Gramm-Leach-Bliley Act</a> eliminated Great Depression-era restrictions on activities like investment banking and selling insurance. Many banks expanded into these new activities through mergers, such as <a href="https://www.nytimes.com/1998/04/07/news/citicorp-and-travelers-plan-to-merge-in-record-70-billion-deal-a-new-no.html">Citicorp’s acquisition of Travelers insurance company</a> and <a href="https://archive.nytimes.com/www.nytimes.com/learning/teachers/featured_articles/20000914thursday.html">Chase Manhattan Bank’s combination with investment bank J.P. Morgan</a>. </p>
<p>The third wave of bank mergers began during the <a href="https://theconversation.com/us/topics/2007-08-financial-crisis-12885">2008 financial crisis</a>, when several financial giants acquired failing firms, often with government assistance. JPMorgan Chase acquired <a href="https://www.nytimes.com/2008/03/16/business/16cnd-bear.html">Bear Stearns</a> and <a href="https://www.nytimes.com/2008/09/27/business/27wamu.html">Washington Mutual</a>, Bank of America absorbed <a href="https://www.nytimes.com/2008/09/16/business/16merrill.html">Merrill Lynch</a> and <a href="https://www.nytimes.com/2008/01/11/business/worldbusiness/11iht-bofa.3.9157464.html">Countrywide</a> and <a href="https://dealbook.nytimes.com/2008/10/03/wells-fargo-to-merge-with-wachovia/">Wells Fargo merged with Wachovia</a>. These crisis-induced mergers created the <a href="https://www.wsj.com/articles/how-u-s-banks-took-over-the-world-11567589403">behemoth financial conglomerates that dominate</a> the U.S. financial sector today.</p>
<p><iframe id="HJLQk" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/HJLQk/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>Now a fourth wave may be underway, triggered by <a href="https://www.cnn.com/2018/03/14/politics/banking-bill-vote-mike-crapo/index.html">Trump-era financial deregulation</a> that made it easier for banks to get bigger. COVID-19 has also contributed to bank consolidation. The Fed responded to the pandemic by setting interest rates near zero, which has made it harder for banks to earn profits off lending and <a href="https://www.forbes.com/sites/palashghosh/2021/04/26/growth-mode-ny-community-bancorpflagstar-deal-underscores-flurry-of-bank-mergers-amid-low-rates-and-less-pandemic-uncertainty/?sh=2a6567375c8b">has encouraged more mergers</a>.</p>
<p>Within the past year, <a href="https://www.federalreserve.gov/newsevents/pressreleases/orders20200930b.htm">Morgan Stanley</a> and <a href="https://www.federalreserve.gov/newsevents/pressreleases/orders20210514a.htm">PNC Bank</a> have completed significant acquisitions, and several more regional banking deals <a href="https://www.cnn.com/2021/07/16/investing/bank-mergers-stocks/index.html">are awaiting approval</a>.</p>
<p>In other words, this recent trend shows <a href="https://www.americanbanker.com/news/our-dance-card-is-filling-up-more-banks-mulling-m-a">few signs of slowing down anytime soon</a>.</p>
<h2>The high costs of consolidation</h2>
<p>The rapid consolidation of the U.S. banking sector is concerning because bank mergers can hurt consumers and the broader economy in several ways, according to <a href="https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1557&context=yjreg">my</a> <a href="https://www.ftc.gov/public-statements/2020/10/comment-commissioner-chopra-professor-jeremy-kress-us-department-justices">research</a>. </p>
<p>For example, bank mergers <a href="https://www.doi.org/10.1111/j.1540-6261.2006.00847.x">increase the cost and reduce the availability</a> of consumer financial services. Bank mergers often <a href="https://www.doi.org/10.1257/app.20170543">lead to branch closures</a>, <a href="https://www.washingtonpost.com/news/wonk/wp/2013/07/09/the-internet-didnt-kill-bank-branches-bank-mergers-did/">inconveniencing customers</a>. The negative effects of bank consolidation are <a href="https://scholar.harvard.edu/vbord/publications/bank-consolidation-and-financial-inclusion-adverse-effects-bank-mergers">especially pronounced</a> in poorer neighborhoods, where high-fee check-cashing companies and other predatory financial service providers proliferate following bank mergers.</p>
<p>Small businesses also suffer when banks merge. With fewer banks competing in a given market, <a href="https://doi.org/10.1016/S0304-405X(98)00036-1">small</a> <a href="https://doi.org/10.1016/j.jbankfin.2006.10.009">business</a> <a href="https://fedinprint.org/item/fedpwp/4381/original">lending declines significantly</a> following a merger. For small businesses that are able to get loans, <a href="https://www.doi.org/10.1111/1540-6261.00424">credit becomes more expensive and average loan size shrinks</a>. As a result, <a href="https://www.doi.org/10.1016/j.jbankfin.2007.11.015">fewer entrepreneurs start small businesses</a> after banks consolidate. </p>
<p>Post-merger declines in small business lending and formation also have detrimental effects on economic development. For example, with fewer small businesses, bank mergers have been associated with <a href="https://www.doi.org/10.1111/j.1540-6261.2006.00847.x">decreases in commercial real estate development</a>, new construction activity and local property prices. </p>
<p>Meanwhile, fewer small businesses leads to fewer good jobs. Indeed, in areas affected by bank mergers, <a href="https://www.doi.org/10.1111/j.1540-6261.2006.00847.x">unemployment has increased, median income has declined</a> and theft has become more frequent.</p>
<p>Finally, big bank mergers increase the risk of another financial crisis. <a href="https://doi.org/10.1016/j.jimonfin.2017.12.002">Numerous</a> <a href="https://doi.org/10.1016/j.jbankfin.2013.11.032">empirical</a> <a href="https://doi.org/10.1016/j.jbankfin.2009.01.006">studies</a> have demonstrated that large bank mergers threaten financial stability. When banks grow through mergers – as many did in the runup to the 2008 crisis – the consequences of their failure become <a href="https://doi.org/10.1016/j.jcorpfin.2020.101592">more dire</a>.</p>
<h2>Regulators loosen their grip</h2>
<p>Bank consolidation, of course, is not always bad. Some bank mergers – particularly among community banks – can <a href="https://www.doi.org/10.1111/j.1468-5957.2007.02059.x">reduce banks’ costs</a> without harming consumers or endangering the financial system.</p>
<p>In my opinion, however, bank regulators – who have to approve all mergers – have failed to differentiate innocuous bank mergers from those that are likely to hurt consumers.</p>
<p>In 1960, the <a href="https://fraser.stlouisfed.org/title/bank-merger-act-federal-deposit-insurance-act-amendment-1024">Bank Merger Act</a> directed federal bank regulators to consider the public interest when deciding whether to approve or deny a bank merger. It also authorized the Department of Justice to block a merger that substantially lessens competition. </p>
<p>At first, regulators regularly rejected bank mergers. From 1972 to 1982, for example, <a href="https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1557&context=yjreg">the Federal Reserve denied</a> more than 60 merger proposals.</p>
<p>Over time, however, regulators have become far more deferential to banks that want to merge. According to my research, the Federal Reserve <a href="https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1557&context=yjreg">has now approved more than 3,500</a> consecutive merger applications since 2006 without issuing a single denial.</p>
<p>[<em>Over 109,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p>
<figure class="align-center ">
<img alt="Jamie Dimon raises his left hand and points his index finger in a gesture as he stands in front of a glass lectern with the Chase logo behind him and an outline of a city in blue." src="https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&rect=178%2C124%2C4997%2C3321&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/413180/original/file-20210726-19-sd3sso.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jamie Dimon’s JPMorgn Chase is the largest U.S. bank after gobbling up at least a dozen other lenders.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/390MadisonRibbonCuttingwithJamieDimon/e4dc88599a1c41a8ad07242ca7d574d6/photo?Query=JPMorgan&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=861&currentItemNo=77">Adam Hunger/AP Images for JPMorgan Chase & Co</a></span>
</figcaption>
</figure>
<h2>No more rubber stamp</h2>
<p>Biden’s executive order seeks to end this <a href="https://www.americanbanker.com/opinion/fed-is-a-rubber-stamp-for-bank-mergers-its-a-problem">rubber-stamping of bank mergers</a>. The order is very broad, however, and leaves the details for the regulators to figure out. </p>
<p>In the past, I have suggested several ways to improve bank merger oversight. For example, policymakers could <a href="https://www.ftc.gov/public-statements/2020/10/comment-commissioner-chopra-professor-jeremy-kress-us-department-justices">strengthen antitrust rules</a> or <a href="https://www.americanbanker.com/opinion/cfpb-should-have-a-say-in-bank-mergers">authorize the Consumer Financial Protection Bureau to block a merger</a> if a bank has a poor consumer compliance record. </p>
<p>The <a href="https://www.justice.gov/opa/pr/statement-attorney-general-merrick-b-garland-justice-department-s-implementation-executive">Department of Justice has promised</a> to implement Biden’s executive order in the coming months, and Fed officials have <a href="https://www.federalreserve.gov/newsevents/pressreleases/brainard-statement-20210514.htm">expressed</a> <a href="https://www.federalreserve.gov/newsevents/speech/bowman20210216a.htm">interest</a> in overhauling their framework for bank mergers, as well. In addition, Sen. Elizabeth Warren and U.S. Rep. Chuy Garcia have <a href="https://www.warren.senate.gov/newsroom/press-releases/senator-warren-and-representative-garca-announce-introduction-of-the-bank-merger-review-modernization-act-to-end-rubber-stamping-of-bank-merger-applications">proposed legislation</a> drawing on my research that would significantly strengthen merger oversight. </p>
<p>With a fresh approach, I believe that policymakers can ensure that bank mergers support, rather than impede, the emerging economic recovery.</p>
<p>_Corrects story to remove reference to TD Ameritrade.)</p><img src="https://counter.theconversation.com/content/164689/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeremy Kress does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A handful of banks now dominate the US financial sector. This consolidation has resulted in higher costs for consumers and small businesses and put the economy at greater risk of a financial crisis.Jeremy Kress, Assistant Professor of Business Law, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/845942017-09-26T03:13:54Z2017-09-26T03:13:54ZATM fees may be gone but what will replace them?<p>It has been <a href="http://www.theaustralian.com.aubusinessopinionalan-kohleratm-fees-the-banks-rainyday-pr-winnews-storyfa2318d7762e9b7e3fc9e60cefbd9f13">suggested</a> that the <a href="https://www.commbank.com.au/guidance/newsroom/commonwealth-bank-cuts-atm-withdrawal-fees-201709.html?ei=card-view">decision</a> by the <a href="http://www.abc.net.au/news/2017-09-24/commonwealth-bank-and-westpac-axe-atm-fees-for-non-customers/8979250">big four banks</a> to drop ATM fees is <a href="http://www.canberratimes.com.au/business/banking-and-finance/banks-ditch-atm-fees-but-calls-for-a-royal-commission-remain-strong-20170924-gynoee.html">penance</a> for recent wrongdoings. But it is far more likely that dumping these unpopular fees has been canvassed behind the scenes for some time. </p>
<p>In Australia, ATM use is <a href="http://www.apca.com.au/docs/default-source/decline-of-cheques---milestones/towards-the-digital-economy-milestones-report-(november-2016).pdf">declining</a> by about 5% per year. Plenty of alternatives to getting cash are available, such as supermarket checkouts, and new technologies will only make ATMs more redundant. The question is, where will banks replace the revenue from removing ATM fees? </p>
<p>The RBA has <a href="https://www.commbank.com.au/guidance/newsroom/commonwealth-bank-cuts-atm-withdrawal-fees-201709.html?ei=card-view">reported</a> that some 250,000 so-called “<a href="http://www.apca.com.au/docs/about-payments/brochure.pdf?sfvrsn=0">foreign</a>” withdrawals are made each year. This is when you withdraw money from an ATM operated by a different bank. But this is less than a drop in the ocean compared to the <a href="https://www.bankers.asn.au/images/uploads/ArticleDocuments/192/ATM%20fact%20sheet_updated%20Jan%202016.pdf">725 million</a> total ATM transactions made in Australia each year. </p>
<h2>New technologies threaten ATMs</h2>
<p>Sometime later this year a couple of new technologies will be launched that further undermine ATMs. The biggest will be <a href="http://www.nppa.com.au/">NPP</a>, short for New Payments Platform. Another is <a href="http://www.bpay.com.au/osko">OSKO</a>, a new payment mechanism from the people who brought you BPAY. Soon people will be asking you if you want to OSKO that!</p>
<p>NPP is a <a href="http://www.apca.com.au/about-payments/future-of-payments/new-payments-platform-phases-1-2">brand-new system</a> that has been built from the ground up to be fast, reliable, flexible and able to handle the high volume of payments needed to operate a modern banking system. </p>
<p>If and when it works, the NPP will change the way that payments are made in Australia. Rather than putting a payment on a credit card or waiting a few days for a payment from another bank to clear, with NPP payments will be cleared in a few minutes or less. </p>
<p>Using NPP, anyone will be able to make an almost instantaneous transfer of funds into the bank of a supplier, such as a plumber (can you OSKO that?). Late at night one party animal will be able to transfer money from his/her account to a friend, in return for some of the folding stuff. With NPP, everyone with a smartphone and spare cash is an ATM.</p>
<p>The technical boffins at NPP have been <a href="http://www.apca.com.au/about-payments/future-of-payments/new-payments-platform-phases-3-4">beavering away</a> for over <a href="http://www.apca.com.au/docs/2014-media-releases/australia-s-leading-financial-institutions-sign-up-to-build-the-new-payments-platform.pdf">four years</a> building the Formula 1 of payment systems. With the help of international experts from the SWIFT organisation (which handles <a href="https://www.swift.com/about-us/swift-fin-traffic-figures">millions of high value payments</a> each day between the world’s largest banks), <a href="http://www.apca.com.au/docs/2014-media-releases/australia-s-leading-financial-institutions-sign-up-to-build-the-new-payments-platform.pdf">support from the Reserve Bank of Australia</a> and money from the biggest Australian banks.</p>
<h2>Replacing ATM revenue</h2>
<p>So where does that leave ATMs? Apart from possible conduits for <a href="http://www.abc.net.au/news/2017-08-11/asic-to-investigate-cba/8796542">money laundering</a>, they are a dying breed in the long term. So in future, how will banks pay for installing, replenishing with banknotes and protecting ATMs against <a href="http://www.telegraph.co.uk/news/2017/07/13/ram-raiders-usetelehandler-steal-atm/">ram-raiders</a>? With extra fees elsewhere, of course. </p>
<p>The banks that stumped up the money for NPP do deserve a reasonable return on their investment, which was not without risk. But there are alternatives to levying fees elsewhere to replace ATM revenue.</p>
<p>Following a lead from the government on promoting a more flexible banking system, the RBA and the competition regulator, the Australian Competition and Consumer Commission (ACCC) <a href="http://www.afr.com/business/banking-and-finance/financial-services/rba-accc-want-more-competition-in-banking-20170920-gyl5jj">recently asked</a> the Productivity Commission to investigate the <a href="https://theconversation.com/four-pillars-or-four-pillows-bankings-comfy-collective-23297">Four Pillars policy</a> with ACCC chairman, Rod Sims, describing retail banking as being:</p>
<blockquote>
<p>characterised by oligopolies comprising the large banks, who can influence products, prices and other conditions in important markets either alone or together. </p>
</blockquote>
<p>The Australian Bankers’ Association <a href="http://www.afr.com/business/banking-and-finance/financial-services/rba-accc-want-more-competition-in-banking-20170920-gyl5jj">demurred</a> of course, saying that they did not:</p>
<blockquote>
<p>believe there are widespread systemic issues in the banking system or regulatory framework that hinder competition. Nor do we believe further regulation is the path to greater competition</p>
</blockquote>
<p>So how to stop another round of opaque, predatory pricing? Give the banks what they say they want - competition.</p>
<h2>Creating more competition</h2>
<p>As part of a radical shakeup of banking, the Indian government has recently introduced the concept of <a href="http://www.thehindu.com/business/all-you-need-to-know-about-payment-banks/article7561353.ece">payment banks</a>, which as the name suggests concentrate almost completely on <a href="http://economictimes.indiatimes.com/wealth/personal-finance-news/how-to-make-the-most-of-payments-banks/articleshow/55704502.cms">payments</a>. As such these “banks” do not take deposits nor make loans, and so the need for prudential, as opposed to consumer, regulation is minimal. </p>
<p>It would not be difficult to create such payment banks in Australia. In fact, with companies like Woolworths, Coles and the Australian Post Office, which already have embryonic payments systems in place, we are almost there already. And of course, as initial investors and developers of NPP, the big banks already have a head start on providing payment services.</p>
<p>But how to create a level playing field? One way would be to float the New Payments Platform. </p>
<p>Assuming that the concept will work, as envisaged by the RBA and banks, there should be a market for the shares, especially among super-funds, which would love the long term stable returns from such a key infrastructure. The proceeds from the sale would be returned to the banks that had the foresight to invest and the public, of course, through the RBA.</p>
<p>A new company would set and publish transparent charges for its “wholesale” services, providing a reasonable return for its shareholders. In turn, the “retail” providers, the payment banks, would charge their customers for each payment and the lowest cost providers would set the pace on prices for the industry. </p>
<p>When payment banks are paired with the new “open banking” initiatives, such as those developed <a href="https://theconversation.com/more-lessons-on-fintech-to-come-for-scott-morrison-71715">in the UK</a> and encouraged by the <a href="https://www.pc.gov.au/inquiries/completed/data-access/report">Productivity Commission</a>, new FinTech (Financial Technology) companies would be able innovate in the payments area and keep costs down.</p>
<p>It looks like one of the most boring areas in banking is about to get a big kick up the pants, and the big banks may not like how it feels.</p><img src="https://counter.theconversation.com/content/84594/count.gif" alt="The Conversation" width="1" height="1" />
ATM fees were already under pressure from new technologies. The question is, what will banks do to replace that revenue?Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/816552017-07-28T03:08:47Z2017-07-28T03:08:47ZThinking like an economist can make your next trip abroad cheaper<p>A <a href="http://cf.cdn.unwto.org/sites/all/files/pdf/annual_report_2016_web_0.pdf">record number</a> of tourists and business travelers visited another country in 2016, and this year is <a href="http://media.unwto.org/press-release/2017-07-14/strong-tourism-results-first-part-2017">already on pace</a> to exceed that tally. </p>
<p>One thing you definitely need when traveling abroad besides a passport is local currency, such as euros in Europe, yen in Japan or rubles in Russia. In the past, travelers would typically <a href="https://www.smartertravel.com/2017/06/19/atms-abroad-travelers-need-know/">withdraw what they need from an ATM</a> in the country they’re visiting or simply use a credit card, letting their bank calculate the cost in their home currency at roughly the market rate. There was usually also a foreign transaction fee. </p>
<p>Increasingly, however, retailers, restaurants and ATMs are offering travelers the option to pay or withdraw money in terms immediately converted into their home currency. <a href="https://seekingalpha.com/article/3651246-aci-worldwides-aciw-ceo-phil-heasley-q3-2015-results-earnings-call-transcript?part=single">Companies</a> <a href="https://seekingalpha.com/article/3971480-planet-payments-plpm-ceo-carl-williams-q1-2016-results-earnings-call-transcript?part=single">offering</a> the <a href="https://seekingalpha.com/article/3969132-cardtronics-catm-ceo-steven-rathgaber-q1-2016-results-earnings-call-transcript?part=single">service</a> call it “<a href="http://www.monexfs.com/solutions/dynamic-currency-conversion/">dynamic currency conversion</a>.” For example, an American tourist visiting Paris is able to use her credit card to pay for a fancy meal at a French bistro in U.S. dollars, instead of euros. </p>
<p>This may seem innocuous – or even convenient – but agreeing to use your home currency in a foreign land can significantly inflate the cost of every purchase. Thinking a bit more like an economist can help you avoid this mistake, and save a lot of money.</p>
<h2>Surge in tourists</h2>
<p>A century ago, international <a href="https://theconversation.com/longing-for-the-golden-age-of-air-travel-be-careful-what-you-wish-for-34177">travel was only for the rich</a>. These days, almost anyone from an industrialized country can see a bit of the world on a budget. </p>
<p>While people <a href="http://time.com/money/3992929/airline-complaints-airfare-service/">commonly complain</a> about “high” airfares, the real cost of flying has never been <a href="https://www.theatlantic.com/business/archive/2013/02/how-airline-ticket-prices-fell-50-in-30-years-and-why-nobody-noticed/273506/">less expensive</a> – it’s half what it was in the early ‘80’s – or <a href="http://www.travelandleisure.com/articles/why-airplanes-are-safe">safer</a>.</p>
<p>And that’s one reason why a record <a href="http://media.unwto.org/press-release/2017-07-14/strong-tourism-results-first-part-2017">1.24 billion people</a> visited another country in 2016. Naturally, financial firms have sought to capitalize on all this wandering by inventing ever more ways to separate travelers from their hard-earned money.</p>
<h2>Buying things abroad</h2>
<p>Tourists rely on credit, debit or ATM cards to pay for hotels, restaurant meals and local trinkets. </p>
<p>A complex international computer network checks if a card is valid for the transaction and transfers the money. Traditionally, to help pay for this, banks and credit card companies have charged customers a <a href="https://www.nerdwallet.com/blog/banking/debit-card-foreign-transaction-international-atm-fees/">foreign transaction fee</a>.</p>
<p>However, banks are now offering more cards with <a href="https://www.nerdwallet.com/blog/top-credit-cards/no-foreign-transaction-fee-credit-card/">no foreign transaction fees</a>. At the same time, “free ATMs” <a href="https://www.ricksteves.com/travel-tips/money/cash-machine-atm-tips">are popping up</a> around the world that don’t charge local transaction fees (though your own bank may still do so).</p>
<p>So how do banks cover the costs of these transactions if they are increasingly letting consumers use the system for free? One way is offering the option to pay in a user’s home currency. <a href="https://www.americanbanker.com/opinion/stop-gouging-travelers-with-dynamic-currency-conversion">Even some bankers</a> warn against consumers <a href="https://www.ricksteves.com/travel-tips/money/card-fees">doing this</a> because the exchange rate used is much worse than the one your bank would offer. </p>
<p>For example, say you’re a Spaniard visiting New York City and shopping for some clothes at a department store. After scouring the store for the right sweater for your mother, you go to the cashier to pay the US$50 bill (tax included). After you swipe your Spanish credit card (which boasts no foreign transaction fee), the cashier asks if you’d like to pay in euros instead of dollars. </p>
<p>If you stick with dollars, your bank would convert the price into euros at about the market rate, €43 at the moment. If you choose to pay in euros, however, the currency conversion includes a fee for the privilege, which may be as much as 10 percentage points. So you might end up paying about €47 instead. </p>
<p>The same thing happens with ATMs. I was recently in London’s Heathrow Airport and needed some British pounds. In the old days, an ATM would simply offer a few denomination options, issue me money and my bank at home would eventually <a href="http://www.xe.com/currencycharts/?from=GBP&to=USD&view=1Y">calculate</a> the cost in U.S. dollars. Instead, the airport ATM asked me if I wanted to lock in the exchange rate and know exactly how many dollars would be debited from my bank account. </p>
<p>I wanted £100 and tried two different ATMs. The currency rate offered in dollars ranged from almost 4 percent to 10 percent more than what my bank charged (or about $134 to $142). I rejected both offers, did the transaction in the local currency and ended up with a total charge of just $129 from my bank.</p>
<p>I have observed numerous international travelers as they made this choice, such as an Italian family arguing about it at the next ATM, and most chose the dynamic conversion into their own currencies. </p>
<p>So why do travelers pay more by accepting a worse exchange rate when they could simply say no? </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=555&fit=crop&dpr=1 600w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=555&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=555&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=698&fit=crop&dpr=1 754w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=698&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/180120/original/file-20170728-23754-14bf0wd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=698&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">An ATM at Heathrow Airport offered to debit my bank account in U.S. dollars rather than the British pounds I was withdrawing. The rate it charged would have been $1.42 per pound, or 14 cents above the market rate that day.</span>
<span class="attribution"><span class="source">Jay Zagorsky</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Three functions of money</h2>
<p><a href="http://businessmacroeconomics.com/">Economists</a> consider any item as <a href="https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money">money if it performs three different functions</a>: unit of account, store of value and medium of exchange. Two out of three explain why so many international travelers act the way they do.</p>
<p>The first function of money is a <a href="http://money.visualcapitalist.com/tag/unit-of-account/">unit of account</a>, which is how people post and keep track of prices. This is why banks and credit card companies get people to agree to pay in the currency where they live, instead of using local money.</p>
<p>When people travel to a country with a different currency, they often mentally keep track of their spending using their home currency, converting all prices in their heads as they shop and eat. If an ATM or credit card terminal asks if you want to pay for something in the currency you use as your unit of account, your brain says yes. </p>
<p>Money also acts as a <a href="https://www.jstor.org/stable/1914465">store of value</a>. Items used as money provide the ability to make purchases now and also in the future. At the end of a trip, travelers not planning on returning to a country tend to spend leftover money in airports buying things they don’t really want. They don’t want to hold onto foreign bills since they are not a store of value. For the same reason, they prefer to be charged in their home currency when getting money from an ATM.</p>
<p>Money is also a <a href="https://www.jstor.org/stable/40657688">medium of exchange</a>, which is anything readily acceptable as payment to buy or sell goods and services. This is why people have to convert money when they travel abroad. In New York City, a dollar bill is a medium of exchange for food, drink or a ride on the subway. However, those dollars are not a medium of exchange in, say, China, where waving a wad of greenbacks would mostly get you stares. And that’s why travelers must convert money from one currency to another.</p>
<h2>How to save money abroad</h2>
<p>When faced with an ATM or credit card machine that asks if you want to convert to your home currency, I recommend you decline, especially if you went to the pain and effort to ensure you have a card or <a href="https://thepointsguy.com/2014/02/the-top-11-checking-accounts-for-avoiding-foreign-atm-fees/">bank with no extra foreign exchange fees</a>. Even if you don’t have one, and your debt card charges a fee, in most cases it still makes sense to use the local currency.</p>
<p>An exception to this rule, of course, is if your bank or credit card charges a very high fixed foreign exchange fee and you need only a little bit of money. If this is your case, then saying yes might save you money even if you get a poor exchange rate.</p>
<p>The main thing is: Think it through! Resist your natural inclination to say yes just because it makes you feel comfortable. Don’t be fooled when asked if you want to complete a transaction using your home currency. Using the local currency can save you money, making your next trip abroad less costly.</p><img src="https://counter.theconversation.com/content/81655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Global travelers are being increasingly asked if they want to pay for local purchases in terms of their home country currency. Here’s why you should resist the strong temptation to do so.Jay L. Zagorsky, Economist and Research Scientist, The Ohio State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/631162016-07-27T18:10:39Z2016-07-27T18:10:39ZANZ wins class action on fees, but we still don’t know the real cost of late payments<p>A six year legal battle came to an end yesterday when the High Court ruled in favour of ANZ Bank, finding by a 4-1 majority that the bank
could enforce late payment fees on credit cards. </p>
<p>The lead plaintiff in the class action was Mr Paciocco, who opened two MasterCard accounts with the bank. One card had a credit limit of A$18,000 the other had a A$4,000 limit. </p>
<p>Mr Paciocco was late in meeting his monthly repayments on a number of occasions, and was required to pay late payment fees. The fee was initially $35, with the bank later reducing it to $20. Mr Paciocco was not the only ANZ customer who was late in repaying their credit card debts. During the financial year ended September 2009 the bank had around two million consumer credit card accounts. It charged late payment fees on around 2.4 million occasions, for which it received $75 million.</p>
<p>Mr Paciocco claimed the bank could not enforce the late payment fees because they were “penalties”. Australia’s common law will not allow a party to a contract to enforce a penalty amount under a contract. The question the High Court grappled with was what precisely did the common law understand a penalty to be. Rather annoyingly the Court has returned to the bad habit of each of the five judges hearing the case writing a separate decision. Each judge’s decision covers much of the same ground as the others, with subtle differences here and there. This makes it rather difficult to discern any coherent majority view on any particular issue.</p>
<p>In any event, the Court appeared to agree that a “fee” amounts to being a penalty if it is in the nature of a punishment for non-observance of the credit card contract. That is, it is a penalty if the fee is out of all proportion to the costs or loss caused to the bank by the customer’s late repayment. One view was that a fee becomes a penalty if it is extravagant, exorbitant or unconscionable. That definition sets a very high hurdle for bank customers to surmount when trying to prove a fee is a penalty.</p>
<p>Having decided what a penalty is, the judges were required to determine whether the fee/penalty charged was out of all proportion to the resulting losses caused to the bank. ANZ admitted the late payment fees were not a genuine pre-estimate of the losses it suffered as a result of the late repayment. The Court, however, found the mere fact there was no pre-estimate of the losses to the bank did not automatically mean it was a penalty.</p>
<h2>Experts differ</h2>
<p>Two expert witnesses gave evidence before the lower courts about the costs to the bank of a customer making a late repayment. One witness estimated the average cost to be $2.60. The other expert took into account a range of factors including the “loss provision costs, regulatory capital costs and collection costs” to the bank, and arrived at a much higher figure.</p>
<p>The Court then debated which of the experts had adopted the correct methodology. The majority found in favour of the second witness, the minority judge found the correct figure was closer to that calculated by the first witness, and therefore found the late repayment fee to be a penalty.</p>
<p>The majority also considered whether the bank had acted unconscionably or unjustly under the provisions of relevant legislation, and concluded that the bank had not breached the legislation.</p>
<p>The case confirms that a person alleging a requirement under a contract to make a certain payment amounts to a penalty must jump a very high bar. He or she must establish that the amount being imposed is extravagant, exorbitant or unconscionable.</p>
<p>The case also illustrates the difficulty in calculating the costs to the bank of customers making late repayments. The onus is on the customer to show the bank is acting extravagantly. It is somewhat disappointing for the many bank customers who are subjected to late payment fees that the Court favoured a costing methodology that itself was arguably extravagant and exorbitant.</p><img src="https://counter.theconversation.com/content/63116/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin Malbon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The High Court found late credit card payment fees were not extravagant, but the experts disagreed on the actual cost to the bank.Justin Malbon, Professor of Law, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/210022013-12-10T03:25:38Z2013-12-10T03:25:38ZFeeling ripped off? ANZ class action opens debate on gouging<figure><img src="https://images.theconversation.com/files/37066/original/vr65m9qw-1386288248.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The ANZ bank fee class action has opened the door to target other companies charging excessive fees.</span> <span class="attribution"><span class="source">Shutterstock.com</span></span></figcaption></figure><blockquote>
<p>A bank charges customers A$35 every time customers fail to make the monthly payment on their credit card by the due date. </p>
<p>An airline charges $10 or more for printing boarding passes if passengers forget to print their own. (Some European airlines have charged much more).</p>
<p>A supermarket in an inner-city location offers free parking for the first hour, and then charges A$65 for stays of one to two hours.</p>
</blockquote>
<p>These examples are real and recent. They all, to varying extents, attract accusations of price gouging or exploitation by service providers. </p>
<p>And they all raise legal questions similar to those involved in the class action that resumed this week against ANZ over bank fees. </p>
<p>The issues are not new to lawyers, but what is remarkable is the size of the class of plaintiffs (said to be close to 40,000 customers), the amount of money at stake, and the potential for a successful outcome to affect other banks and large service providers in other industries. Class actions against other Australian banks are also reportedly underway.</p>
<p>ANZ customers are challenging the legitimacy of certain fees charged by the bank in a range of situations. Those fees include, for example, dishonour fees or honour fees applied to debit transactions which would overdraw the customer’s account. (The former fee is charged where the transaction is declined; the latter fee applies where the transaction is approved.) Another fee being challenged is the late payment fee applied to certain credit cards.</p>
<p>In recent years, the major banks have moved to reduce many of these fees.</p>
<p>It is easy, but too simplistic, to cast this as a struggle between David and Goliath, or between victims and villains. </p>
<h2>A conflict of values</h2>
<p>At the heart of the issue lies a conflict of several important policy ideas. One idea, which is a very powerful one in contract law, is freedom of contract. A customer can choose whether to enter into a contract for particular services with a bank; the customer can also choose to take their business elsewhere if they are offered a better deal. </p>
<p>Another related idea has a moral dimension: people should not break their promises. Once a person has entered a contract, he or she should adhere to the terms agreed. </p>
<p>Against this, there is the pragmatic view that people often do not come to contracts on equal terms. The inequality might relate to their knowledge, bargaining power, or ability to understand what is in their best interests. I have not heard anyone seriously contend that banks and individual customers are on an equal footing in all respects. </p>
<p>The last idea, again very important, is the value of certainty. If courts will intervene and strike down or alter contracts, then how will people know when a contract will be enforced and when it will not? To put it another way, to what extent, and in what manner, should courts interfere in parties’ bargains?</p>
<p>This all requires a delicate balancing act. The starting point for lawyers is that the contract operates as agreed; a person needs to point to some exceptional reason to annul or alter the contract. Here, the law often focuses on what might be called procedural factors. These are circumstances that adversely affect a person’s decision to enter into a contract. Sometimes the terms of the contract itself can also be considered. The bank fees are being attacked from both angles, though the latter aspect has so far received the most attention. </p>
<h2>Is it ‘unfair’?</h2>
<p>This attack is itself interesting, and raises two important questions of principle. First, what terms of a contract should be open to challenge for unfairness?</p>
<p>At one end of the spectrum, it’s accepted that the essential elements of the bargain – the basic product or service and the price – are usually not open to challenge. At the other end of the spectrum, it’s accepted that fees or charges payable for breach of contract – that is, not doing what you promised – should be open to challenge. Between those extremes there is some room for debate. Some of the bank fees might fall into that area.</p>
<p>Secondly, assuming the fees can be challenged, how do we determine what is fair? That question is harder than it seems. </p>
<p>According to one test, we look at the amount payable and the event that triggers the payment, and ask: is the amount a genuine estimate of the bank’s loss if the customer breaches the contract; or is it extravagant or out of all proportion, a kind of deterrent or punishment? If the former, the fee is valid and payable. If the latter, the fee is ineffective as a “penalty” and the bank must prove its actual loss, which may be much less. It remains to be seen what ANZ’s true cost is in the various fee situations. </p>
<p>The real worry for big banks and in fact any service sector business, is that their “change” fees, “late” fees, “administration” fees, “cancellation” fees etc may not reflect the real cost of those events. Instead, they are nice round figures, stiff enough to encourage consumers to act in the desired manner, or make a tidy profit when they do not. These companies are likely to become the next targets if ANZ’s customers succeed in the present case.</p><img src="https://counter.theconversation.com/content/21002/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wayne Courtney does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A bank charges customers A$35 every time customers fail to make the monthly payment on their credit card by the due date. An airline charges $10 or more for printing boarding passes if passengers forget…Wayne Courtney, Senior Lecturer, Faculty of Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.