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Keep their greedy hands out of our pocketsArticle added by Michael Pinkans, CFA on October 26, 2011
Mike Pinkans

Michael Pinkans, CFA

Freehold, NJ

Joined: July 18, 2011
Are You Out of Sight and Out of Mind with Your Prospects?
No other industry provides the security and flexibility that we provide. Let's make sure that our voices continue to be heard by our elected officials, so we can continue to provide Americans certainty in an uncertain world.

On Sept. 30, 2011 Sen. Dick Durbin, D-Ill., slammed Bank of America after the company announced it would charge customers a new $5 monthly fee just for using their debit cards. Being on the board of directors of a financial institution myself, I know that there are really two ways these institutions make a profit — by the interest rate spread or by charging fees.

To at least maintain profitability, many financial institutions have lowered the amount credited to savings accounts as overall interest rates have declined. However, with many financial institutions crediting almost no interest, the ability to make a profit on the spread has decreased, forcing these institutions to implement, or at least consider, added fees.

"It's overt, unfair and I hope their customers have the final say," Sen. Durbin said. "Banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works."1

But one could argue that it was the Senate itself that forced this change, as under the 2010 Dodd-Frank Act there is a rule to cap debit card swipe fees. On Oct. 1, 2011, the Fed implemented the rule, which limits the fees that card networks can charge merchants to 21 cents per transaction — about half the average amount retailers have paid in the past. Sen. Durbin was a proponent of this regulation.

By decreasing the swipe fees paid, large retailers like Wal-Mart will reap millions more in profits, while the banks are estimated to lose as much as $8 billion in revenue. While Wal-Mart may argue that their higher profit margins will lead to lower customer prices, it's really a zero-sum game, as we can see.

As profits shift from banks to retailers, the banks are looking to make up for lost revenue. I'm not defending bank profitability, only pointing out there have been at least three things that the federal government has done recently to dampen bank profitability:
    1. Instituting swipe fee legislation

    2. Keeping interest rates low to spur economic growth, which lowers the spread a bank makes on interest rates

    3. Increasing the reserve requirement on capital, forcing banks to hold more cash rather than earning higher income on loans
And how, with these particular regulations, is the customer better off overall? Why can't customers make a choice based on the company's value proposition, where cost is only one factor? Why do some individuals hold an American Express Platinum card with a minimum $450 annual fee over the American Express Gold or Green card? Because of the perceived or real value. Generally, Americans still have choices. We can choose not to do business with Bank of America because of the new fees and move our relationship to another institution. And some will. We make these choices every day when we buy gas, groceries, etc. We can choose not to do business with a retailer that does not take certain credit cards, such as American Express. What's the whole point in all of this?

Why are there over a thousand insurance companies operating in the United States? Customers (and producers) must see value over sheer cost. Some companies believe their brand and size give them the ability to increase their profit margins by charging more for a comparable product. Other companies believe their value comes from a better service model. But the continued regulation affecting our industry isn't leading to better and/or lower pricing.

The government — both state and federal — is imposing new reserving requirements as well as forcing lower long-term interest rates affecting company profitability, which could lead to more layoffs, increased pricing, or both. Also, the tax-favored benefits of our contracts are constantly under attack, as the government looks for new revenue sources.

No other industry provides the security and flexibility that we provide. Let's make sure that our voices continue to be heard by our elected officials, so we can continue to provide Americans certainty in an uncertain world.

1http://news.businessweek.com

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