The High Cost of Saving

By John Greenwald

Maryellen Gordon is still fumbling. When the Manhattan freelance writer opened a checking account at Manufacturers Hanover bank six years ago, she could keep as small a balance as she liked for a fee of just $5 a month, and there was no charge for using the automated teller machines. Then Manufacturers Hanover merged with Chemical Bank in 1992, after which Gordon had to keep at least $3,000 in the bank to avoid being charged each time she used the ATM system. Enough was enough. Earlier this year she took her money to a credit union where, for $2.50 a month, she can write as many checks as she wants -- even draw down her balance to zero. "I probably had $25 taken out every month at Chemical," she recalls, "before I finally said, 'This is insane. What am I doing?' "

Whether they're putting their paychecks in or taking cash out, Americans like Gordon are increasingly feeling the pinch as U.S. banks raise their fees for everything from bounced checks to automated cash transactions. To recoup profits lost to bad loans as well as to aggressive rivals like money-market funds that offer their own checking accounts, commercial banks nearly doubled their service charges between 1985 and 1992, according to the U.S. Public Interest Research Group (USPIRG), a Washington-based consumer lobby. Even the victims of bad checks must now routinely shell out fees for the pain of having been bilked.

The outcry over soaring charges has reached Congress, where Massachusetts Democrat Joseph Kennedy, who chairs a House subcommittee on consumer credit, will hold hearings next week. "We're seeing a dramatic rise in bank fees across the country," Kennedy says. As a result, "we want the best possible disclosure. We have truth in lending; maybe we should have truth in fees."

The bankers say they have no choice but to cover the rising costs of services and to make up for anemically low interest rates. "We are the largest branch network in New York state and the largest ATM network," says John Stack, managing director of branch banks at Chemical. "We have a superb offering to customers, which costs money, and we are in a low-interest-rate environment in which deposits are worth less to banks. When you combine those things, we must raise fees."

The jacked-up charges have indeed helped banks rebound from the late 1980s and early 1990s, when sour real estate loans severely depressed industry earnings. Bank profits reached a record $43.4 billion last year, easily topping the previous peak of $32.1 billion in 1992, at least in part because of banks' growing reliance on service charges for income. Fees rose from just under 25% of banking income in 1984 to nearly one-third in 1992, according to the Consumer Federation of America. On top of that, lenders have enriched themselves by keeping a large spread between the cost they pay depositors for their money -- about 3% -- and what they charge for personal loans -- more than 14%.

Automated teller machines have been particularly lucrative. ATMS were once touted as free high-tech conveniences, but a joint study by the Consumer Federation and uspirg found that customers now pay 95 cents on average each time they use a local ATM system and $1.10 for each use of a national network. And because ATMS require neither salaries nor benefits, most of those fees flow straight to the bottom line; another Consumer Federation survey estimated that banks typically reap 78 cents in profit for every $1 they charge to use the machines. Some go so far as to levy a penalty on customers who fail to use their ATM cards within a 12-month period -- a charge increasingly recommended by banking consultants.

Perhaps most galling of all are the fees charged account holders who unwittingly deposit bad checks. Thirty-five percent of U.S. banks resorted to such charges in 1991. Today it's up to 85%. USPIRG., which conducted the study, says that besides being stuck with bum checks, victims are paying on average a $5.29 fee to their bank for the privilege of being stiffed.

In poor neighborhoods residents can wind up paying even higher fees for financial service because of the shortage of bank branches. The lack of accessibility has forced many inner-city dwellers to turn to storefront check- cashing offices, which can charge as much as 3% of the value of a check. A 1991 Los Angeles city council survey found 133 check-cashing offices -- vs. only 19 bank and savings-and-loan branches -- serving South Central L.A.'s largely minority population of nearly 600,000. Right next door, more affluent (and Anglo) Gardena had 21 bank branches for fewer than 50,000 residents. Elsewhere, many consumers are fleeing to credit unions to escape the escalating bank costs. Membership in these nonprofit institutions, which are typically linked to workplaces, grew nearly 12% in the past five years, to more than 65 million people.

Even bankers agree that the answer is to shop around. "Consumers really don't have to be paying more than in the past," says Virginia Stafford, a spokeswoman for the American Bankers Association. "The key is in shopping for a bank that fits your needs." But by continually raising their fees, many banks are indicating that they may no longer have much interest in keeping small customers.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Joe Lertola

CAPTION: CASHING IN

Average percent change in bank fees from 1990

With reporting by Elaine Lafferty/Los Angeles and Stacy Perman/New York