This past week, Wells Fargo was ordered to pay over $200 million to customers they ripped off by nefarious transaction processing. It is pretty simple, actually, and not limited to Wells Fargo. Instead of processing debit card and check transactions on a first-come basis, the bank decided to process transactions descending by value, thereby racking up the maximum possible number of overdraft fees (in some cases over $300 per day). The judge in the case lambasted Wells Fargo for this practice, which isn't illegal except for when it is done surreptitiously. $200M is far from a paltry sum, but compared to the haul these banks generate from the larger pool of fees, it is a drop in the bucket.
This case illustrates a singular problem with modern day corporate finance: the focus on short-term profits over long-term viability. Rather than developing shareholder equity through traditional means (e.g., growing the pool of commercial and consumer customers), banks are increasingly relying on short-term revenue generating schemes that simply transfer wealth from their customers to their shareholders. The recently-passed financial reform bill and the creation of a first-of-it's-kind consumer financial protection agency are, at the very least, calling into question the permanency of these revenue sources, and as of today (August 15), banks are required to have customers "opt-in" to overdraft programs.
Even without legislative intervention, I find it hard to imagine a situation where banks continue to "innovate" ways to charge the hell out of customers. First, according to a FDIC report in 2008, the majority of overdraft fees are paid by those who can least afford it. This makes sense, as poorer customers are more likely to maintain low balances. This also means that, in general, poor customers are more likely to rack up other sorts of "account maintenance" fees (e.g., minimum balance requirements, late payments), implying that the fee business relies disproportionally on low-income accounts. This is not a good business strategy for any company targeting consumers... you can only get blood from a stone for so long.
Second, while fees have skyrocketed in recent years, the real cost of conducting financial transactions has plummeted due to technological innovation and low interest rates. This has allowed online-only banks and credit unions to realistically compete with national banks***.
Finally, and most important, by engaging in usurious practices and having that knowledge made public, big banks are less likely to find themselves competitive in the consumer-banking marketplace (and potentially the commercial marketplace, depending on how far public image considerations go). A recent example is the "move your money" campaign that garnered national attention a few months ago. Banks are, in effect, sacrificing reputation and long-term growth prospects for short-term profits, and as they rely on a dwindling customer base for revenue generation, there is no way this is sustainable in the long run.
Now, banks are claiming that they will have to find new sources of "revenue" to replace that lost by regulations. There is no doubt they will try to do this, and I say to them: good luck.
***Fidelity and Etrade both offer consumer banking services that refund all ATM fees (they do not have branches, and I imagine it is cheaper for them to pay the fees than it is to support the ATM infrastructure necessary for a national bank). They will charge fees if combined-account minimums are not reached. Other banks (Capital One) do not charge foreign transaction fees. Credit unions rarely have account maintenance fees on their basic checking accounts (go to http://www.money-rates.com/ ).
Disclaimer: technically, I am a Wells Fargo customer. I opened a checking account to take advantage of their "two-for-one" season pass to Winter Park and Copper, and plan on closing the account as soon as possible. I have a checking account, a savings account, and a mortgage with my university credit union, and a checking account with Fidelity. Although I occasionally overdraw my credit union account, I have a free line of credit that activates in those circumstances. Most banks offer this if your credit is not horrible.
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