Sticks and carrots

In Greek mythology, the hundred-headed Hydra grew another snout, every time a hero sliced one off.

Since Dodd Frank legislation created the Consumer Financial Protection Bureau to curb exploitation of consumers, the financial firms have riposted with a vengeance. They have imposed new inactivity penalties, foreign exchange charges and checking account maintenance fees across the board. Are the extra charges intended to be more punitive (the stick), to discourage destitute customers from signing up altogether, or more motivating (the carrot), to incent account holders to cross purchase more products?

Last month, the Federal Reserve requested comments on new proposals on setting standards and limits on the interchange fees paid by merchants to debit card issuers. Banks are already retaliating, contemplating annual fees on debit cards, and restricting the number and size of debit transactions customers can make.  Last week, Bank of America (BofA), which serves half of all American households in some capacity, told employees it was planning to restructure charges. The Wall Street Journal reports that BofA will segregate accounts into four categories: Premium, Enhanced, eBanking and Esssentials. Customers in the first three segments, who use higher-balance, more active accounts, may waive fees; the “Essentials”, who opt for bare bones services, will be subject to compulsory monthly charges. (article continues below)

Consequences could be dire for the poorest customers, propelling into the “Essentials” into the ranks of the unbanked. They are more likely to resort to check cashers or payday lenders, which may charge up to 30% to desperate borrowers. Surely simple banking should be a fundamental service, akin to clean water and electricity, in an advanced society. Perhaps the Fed’s shiny new CPFB, slated to open shop July 21, will add that oversight to its extensive to-do list.

The Fed owes one to the poor already. In an ultra loose credit environment, sophisticated investors thrive; low income people, who are less shock resistant, become hooked on credit and fall through the cracks. Thus, the central bank has a major impact on the social fabric of American society, more than Congress does, when it moves the discretionary budget a few inches to the left or right.

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Vanessa Drucker is the American Editor of Fund Strategy, based in New York City.  She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.