Some of the big U.S. banks are running the risk of losing millions of customers this year following rises in many of their fees, reported yesterday. Increased or new fees along with the retraction of debit card reward programs are making it difficult for customers to continue their basic banking activities.

Customers are thus opting alternative institutions like community banks and non-profit credit unions, which charge substantially lower or zero fees to regular customers.

The new regulations for protecting consumers and retailers have forced banks to reduce fees for credit cards, debit cards and overdrafts, causing revenue losses in the billions. In a desperate attempt to make up for the lost revenue, banks are now contemplating fee increases.

However, the impact of these changes will vary from consumer to consumer depending on transaction volume. Interestingly, consumers involved in massive transactions with these banks and maintaining large deposits are expected to get higher incentivesand better service. On the other hand, customers with low amount transactions will have to pay a higher price for contributing little or no revenue to banks.  

Banks with Higher Fees

Among the big names, Bank of America Corporation (BAC) is set to increase the monthly fee on its most popular checking account to $12 from $8.95 on May 24. Also, if customers overdraw less than $10 on their accounts, BofA will charge $35 effective June 27. For the upcoming year, the bank plans to replace its existing basic checking accounts with new ones to accommodate a compulsory monthly fee.

JPMorgan Chase & Co. (JPM) has already taken some extreme measures. The bank has raised fees for overdraft transfers and outgoing wire transfers as well as stopped payments. Also, fees for basic checking accounts of the bank’s new customers have been doubled to $12.

Boon for Other Institutions?

With the fee hikes, many small customers are no longer interested in continuing their basic banking activities with these big banks. The have an easy and affordable option available at community banks and non-profit credit unions.

As a result, community banks and credit unions have been prospering. Michigan is a good example, where 322 credit unions gained more than 2,600 members in the first quarter of 2011, according to the Michigan Credit Union League.

Also, some banks, including Huntington Bancshares Inc. (HBAN) and PNC Financial Services Group Inc. (PNC) are trying to grab the opportunity of attracting flying customers by continuing to offer free checking accounts.

Was This Desired?

The government’s fee reduction regulation was primarily intended to protect consumers and retailers, and resist banks from earning super normal profits. This consumer protection was backed by the noble intension of injecting the money into the market through consumers, thereby increasing consumption and ultimately fueling economic growth.

But, as usual, managements of these big banks will never compromise. Finally, they got the excuse to raise fees. Though they will loose some customers in the short run, it’s only a matter of time before they get things back on track.

Banks are moaning that slashing fees for overdrafts, debit cards and credit cardsto protect customers’ interest would invariably lower their revenues, making them incompetent with respect to financials.

As a way out, they are increasing fees for basic banking, which would help them recover revenue. However, the ultimate impact would fall on consumers if all the banks and credit unionsstart increasing fees over a period of time.

BANK OF AMER CP (BAC): Free Stock Analysis Report
HUNTINGTON BANC (HBAN): Free Stock Analysis Report
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