And Banks Can be Regulated

The economists were surprised: legislation designed to curb the hidden fees banks charged their credit card customers actually worked.

They had assumed that the banks, thwarted in raising profits one way, would figure out new ways of compensating for the lost revenue they had come to rely upon. But, crunching the numbers, the economists found that “the new law saved customers an annualized 2.8 percent of the average daily balance on cards.” Over all, that meant a savings to consumers of an estimated $20.8 billion.

According to Floyd Norris, the business reporter for The New York Times, many economists expected the banks “would simply raise interest rates. But the study concludes that did not happen.” The reason was that one of the things customers do pay attention to is the interest rates they pay on their debt. That’s not hidden, and banks know their customers can easily shop around for a better rates if they are available. So market competition kept the banks in line on that.

The law addressed the “hidden” charges, such as penalties for late payments and exceeding the credit allowance, charges hidden in the small print. And then there were the even more hidden charges that some banks applied when customers paid by phone, in some cases, or when banks varied their due dates so confused customers would get it wrong. Late penalties sometimes took effect on noon of the due date. Sometimes banks even charged “inactivity fees” if a customer decided to take a break from running up more debt.

No doubt the existence of the newly established Consumer Financial Protection Agency also acted as a break on some of the more creative new sources of revenue banks might have come up with. Under-funded and hobbled by excessive congressional scrutiny (pushed for by bank lobbyists), the Agency nonetheless loomed in he background as a potential threat, at least a source of embarassment.

Norris concluded “this is a clear case of regulation that worked,” adding that given “all the hostility in Washington . . . to regulation in general . . . that is a very refreshing development.” (See, “Card Act Cleared Up Credit Cards’ Hidden Costs.”)

It’s a surprise to the rest of us as well, as we have seen the power of banks to thwart most efforts to control their practices or to limit their size.

To be sure, banks seem to be doing their best to damage their own reputations. The gigantic penalties recently agreed to by Chase and other banks signal a defensiveness and awareness of public discontent. No doubt, their willingness to pay up may even distract the public from the zeal that prosecutors are showing in pursuing criminal charges for individual bank officers.

But the publics’ growing awareness of income disparity may also be influencing perception of such issues. How can banks continue to quibble about the hidden fees they charge when their officers and investors receive outsized salaries and bonuses that set them further apart from their customers?

It just doesn’t pass the smell test.