Nickels and Dimes Come at a Cost

Hotel resort fees. Airplane seat selection fees. Mobile phone plan termination fees. All of us from time to time find ourselves grappling with a myriad of fees that seem to nibble away at our hard-earned money.

From overdraft fees and ATM surcharges to low account balance fees and in-person service charges, the practice of “nickel and diming” has become increasingly important to banks’ bottom lines as sticky “non-interest income” that helps stabilize swings in earnings. However, the consequences of these seemingly small charges can add up to a significant burden and unintended consequences.

In 2022, Americans paid a staggering $8 billion in overdraft fees alone, with 10% of the population falling victim to these charges annually. And it’s not just the megabanks that are behind this. The Brookings Institution presented a report to Congress where one bank serving military veterans earned between 75% – 100% of its profit from overdraft fees. This raises a critical question: Is it time for banks to reconsider padding the bottom line with such nuisance charges?

Opaque and Exasperating

Overdraft Fees

One of the major issues with these fees is their hidden nature. While many clients are aware of certain charges, the complexity and diversity of fees often make it challenging to keep track. Overdraft and insufficient funds fees, for example, can catch clients off guard, leading to unexpected financial setbacks. It feels fundamentally wrong that someone buying, say an apple for $1 could instead pay $36 for it after a $35 overdraft fee. Then there is the practice of reordering transactions to process the largest withdrawal first, causing others in smaller amounts to overdraft in a domino effect, maximizing the number of overdraft charges. Add to that “extended” overdraft fees that incur additional charges for failing to cover previous overdrafts. This lack of transparency erodes trust between consumers and financial institutions, fostering an environment where clients feel exploited rather than supported.

ATM Surcharges

ATM withdrawal surcharges further contribute to the frustration. The convenience of accessing cash from any ATM comes at a price, with fees imposed not only by the ATM owner, but by the person’s own bank. These charges, often ranging from a few dollars to more significant amounts, are generally not a problem in private banking. But for those making smaller withdrawals, more frequently, they can add up to extraordinary expenses simply to access one’s own money.

Low Account Balance Fees

Another questionable practice is the imposition of low account balance fees. While banks argue that these fees incentivize clients to maintain a healthy account balance, they feel rather like an oil company charging extra if you run low on gas, likely more effective at breeding resentment than driving profit.

Double Cycle Interest

On the credit card side, double cycle interest is a practice where interest is charged on the average daily balance of the current and previous billing cycles — even when an earlier balance had been paid down. Yes, it is as convoluted as it sounds, and serves only to enflame the obvious sense of exploitation.

Fees to See a Real Person

In-person service fees are yet another aspect of nickel-and-diming that raises eyebrows. Charging people for the privilege of interacting with a fellow human teller seems antithetical to the concept of client service. As banks continue to invest in digital banking platforms, it’s essential to strike a balance between automation and personal service.

From Excess to Regulation

This January, the Consumer Financial Protection Bureau (CFPB) issued a new proposal to treat overdraft fees as credit programs subject to scrutiny to validate that fees align with the actual cost of providing the service. While it’s still just a proposal, rest assured that over time every example in this article will trigger a new regulatory regime of rules, supervision, documentation requirements and employee training to combat it.

There is a better path. Take commercial banking fees as an example.Up-to-date technology and trustworthy transaction processing require more human support behind the scenes than most could imagine. This is why the best practice among banks is that the banking relationship on the whole is sufficient to drive revenue to cover the cost of wire rooms, transaction clearing, data security, compliance requirements etc. Where this is not possible or the needs of the client rightly exceed the revenue that can be realized from their deposits alone, the business will compensate the bank with fees that are transparently disclosed. The best banks work with their commercial clients to find the right mix of revenue and support that will mitigate expense to the business while providing the services needed.

The prevalence of nickel-and-diming practices raises serious ethical and financial concerns. The hidden nature of these fees, coupled with their cumulative impact, has far-reaching consequences both in the expense and the level of client trust and satisfaction. Banks have a fresh opportunity to self-regulate by reassessing their fee structures, prioritizing transparency and fairness. There’s no faster way to obviate the need for new – possible onerous – regulations than creating a healthier and more equitable financial environment for all.

About Fieldpoint Private

Fieldpoint Private is a boutique private banking firm established at the onset of the financial crisis by 31 individuals including former Chairmen and CEOs of some of the most well-known and successful financial and consumer firms in America. Their intent was not to craft a firm that would emulate the large, established institutions, but to serve as an alternative. Dedicated to meeting the comprehensive financial needs of highly successful individuals, families, businesses and institutions, Fieldpoint Private offers a powerful combination of private personal and commercial banking services directly and in partnership with our clients’ most trusted advisors. In 2021, Fieldpoint Private founded Fieldpoint Private Trust, increasing the breadth of capabilities available to serve our clients in both sole trustee and co-trustee capacity.

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