You know those letters you periodically get from your bank that contain a lot of legal mumbo-jumbo and are often written in annoyingly tiny type? Although it might be tempting to toss them into the recycle bin, that could be a costly mistake. 

Thanks to what Bill Hardekopf, CEO  LowCards.com, calls “a perfect storm” for the financial services industry, banks across the country are adding new fees and raising existing fees on a wide range of services. And if you don’t know how to avoid them, you could be in for a rude--and expensive--awakening.

So what created this perfect storm? First came banks' bad decisions to extend credit (mortgages, credit cards) to virtually anyone with a pulse. “No credit history? Bad credit history? No problem!” Cracks started to develop as these individuals began to (surprise) have a tough time making their payments, sometimes because the interest rate on an the ARM went up.

As defaults gained momentum, the housing market tanked and millions of people walked away from their mortgages because their homes were no longer worth what they’d paid for them. And we aren't out of the woods: according to the Mortgage Bankers Association, there are currently  nearly 4 million homes in foreclosure. 

Investors started to get nervous when experts were calling the economy the worst recession since the 1930s and layoffs soared, leading to cascading defaults--auto, mortgage, credit card, you-name-it. Oh, in addition, derivative securities nearly or completely killed venerable Wall Street institutions and the banking system teetered on collapse.

Plus, Congress enacted the CARD Act (1), which made sweeping changes to protect consumers, but took away opportunities for credit card issuers to collect revenue from customers. For instance, credit card companies can no longer lure you in with a low, low, low  introductory interest rate and then jack it up a month or two later. Instead, your initial rate must be good for a full year. 

This legislation also sets conditions for over-limit fees, the minimum length of time consumers must get  to pay their bills on time, and prohibits issuers from signing up anyone under age 21 unless certain conditions are met.

To put it mildly, banks and credit card companies haven’t been making as much money as they used to.

Now debit cards--another big money maker for banks--are in the cross hairs of cost cutters. The Federal Reserve is accepting comments on a proposal that would significantly cut the fees banks charge to merchants every time they accept a debit card transaction. The proposal would cap the processing charge at 12 cents, instead of basing it on a percentage (roughly 1.5%) of the dollar amount. According to the National Federation of Retailers, on a $100 purchase, this would reduce the fee sent to the debit card issuer by $1.32.

It adds up. KeyCorp, a regional bank and a relatively small player in the debit card arena, recently reported that debit card fees generate $75-100 million a year. On the other hand, Bank of America (NYSE:BAC), told shareholders in October that it made $2.9 billion on debit card transactions and expects that to drop to $600 million if the Fed’s proposal takes effect this summer.

To sum it up: Bad decisions (giving mortgages and credit cards to people who shouldn’t have qualified for them) + bad timing (the economic downturn) + regulatory changes (Congress passing the CARD Act) = huge drop in profits for banks. 

“Whenever revenue is cut in one shape or form, banks have to make money by finding other ways to make up for it,” says Hardekopf. One thing’s for sure, gone are the days of free checking accounts.

As Hardekopf points out, “One of the easiest ways to look [for generating revenue is] checking account fees because such a large percentage of the population has a checking account.” 

This fact makes it all the more important you understand what the current rules are at your bank. In some states, Wells Fargo has begun charging a monthly fee for a checking account. The same is true for Citi and Chase. BofA is dividing customers into four groups based on how many services they use and how much money they have with the bank. It’s also offering no-fee checking if you swear to never use a human teller. If you do, you’ll be charged $8.95 a month.

It’s time to think about how you want to do your banking. Are you comfortable transacting everything via direct deposits, ATMs and online? All of the major banks will waive their checking fee if you maintain certain balances or meet other requirements, but this might not be possible/practical for you. If your current bank is going to charge you too much for the kind of services you need, then start shopping for a new home for your money. It’s a hassle, but a few hours of phone calls and paperwork could save you $100year. Most small, locally-based banks don’t offer credit or debit cards so they aren’t looking to make up any “lost” revenue and are more likely to offer free checking. (But keep in mind that, compared to a larger bank, they will have fewer ATMs, especially outside your area- a consideration if you travel.) And, Hardekopf says don’t overlook credit unions.

1. Credit Card Accountability, Responsibility and Disclosure Act (2009)

 

 

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.