Fees and surcharges seem to be an unavoidable part of living in a world where banking is big business. If you keep your financial situation simple, diligently shop around, and keep an eye on your money, you can avoid may of the more common fees. In theory, you could increase your fee-avoidance ability by keeping your money outside of the banking and investing system, but that’s an extreme approach that just isn’t feasible for modern life in the United States.
Even the most diligent savers and frugal minds can find themselves faced with fees. They tend to lurk behind corners, waiting in the fine print, for the right time to strike, taking consumers by surprise. Other times, the fees present themselves up front but seem unavoidable.
The fees banks charge their consumers serve several purposes. The first purpose is simply to increase revenue. The second purpose is to modify their customers’ behavior. Well-publicized fees can dissuade customers from partaking in an activity the bank would like to avoid, while the purpose of carefully hidden fees is generally to increase profit. Rationalizations for fees fall into these two categories.
The reason banks charge a variety of fees is simple. They do it because they can. Customers like to complain about paying more money than necessary for the services banks provide, but unless they’re willing to close accounts and find alternatives, banks can continue to operate as they are. And don’t worry; if you want to vote with your feet, there’s probably a fee for that.
That happens to be the first fee I’ll discuss in this compilation of the five most annoying banking fees. These are all fees that I’ve experienced, even after I was more attuned to my personal finance situation. The fees I’ve included in this list are pervasive; many, but not all, institutions may assess these charges. In addition to their pervasiveness, these fees are unnecessary from the customer’s perspective. They are usually avoidable with some research or planning, but once you find yourself faced with a fee, there is often little you can do to avoid it.
1. Account termination or closing fees.
Account closing fees are prevalent with investment accounts, although some savings banks will also charge account closing fees if you don’t maintain your account for a minimum period of time. I experienced this unfortunate event when I came to the realization that I was paying too much for my weekly investments with Wachovia’s discount brokerage. At the time, Wachovia announced a $50 annual fee, making the account too expensive for my tastes, especially when there were free options available.
I had been progressing on a path towards making better financial decisions, and I wanted to transfer my relatively small investment out to a better discount brokerage. I selected Scottrade. Wachovia was also planning to increase their account termination fee from $75 to $95, creating more of an incentive for investors to keep their accounts open and pay the $50 annual fee. I transferred my money out of Wachovia as soon as possible, and I sent a sharply-worded but ultimately ineffectual letter to the CEO.
Account termination fees aren’t limited to just banking. Cell phone and cable television operators use these in their long-term contracts. The rationalization is that mobile phone companies sell phones at a loss (or at least less than market price) with the intent of earning a profit on the monthly service plans for a predefined amount of time. But like in banking, these fees serve mostly as loyalty-enforcers, preventing customers from deserting one brand for the competition in a highly competitive marketplace.
2. Savings account monthly maintenance fees.
Banking is an interesting concept, and since the growth of major national banks and especially during and after the recent recession, we’ve forgotten why banks exist. It may not be apparent since the credit crunch, but the purpose of banks is to lend money. When you open a savings or checking account, you are doing the bank a favor. You are increasing the bank’s ability to give out loans. The loans, in turn, help businesses thrive, moving the economy forward. At the same time, banks in theory earn revenue from these loans, which they can, relatively easily, turn into profit.
The bank should be thanking you, not charging you for your money. And they often do thank customers in the form of interest. In return for your generous deposit, the bank offers an interest rate. With the Federal Reserve still looking to influence the economy, banks can borrow from the central banking system and pay less than if they had to pay interest to depositors. As a result, customers face lower interest rates.
Combine this with the fact that banks have not been lending as openly as they have in the past, their profits are down. In the end, these banks, especially the largest national banks, replace the lost loan income with fees for their depositors, with the rationalization that they are providing a service that customers should pay for.
3. Convenience fees for online payments.
Put yourself in the position as the individual in charge of collecting vehicle registration fees, insurance premiums, or business taxes. Would you rather pay the salaries of a team of employees to go through payments sent through the mail or pay to establish an online presence and payment capability? The latter in many cases is going to be much more affordable. In reality, it’s rarely a choice of extremes, but a combination. Nevertheless, the more you can encourage people to pay online, the less manual labor is necessary.
This is surely a convenience and money-saving endeavor for businesses and the government in the long run. Yet when citizens attempt to pay for these services online, they are often faced with an online convenience fee. Merchant services enabling businesses to accept credit cards can be expensive, and some entities did not accept credit cards at all until they began accepting payments online.
That, plus the IT costs of building an online system, is the rationalization for these fees. When businesses can’t increase the cost of your services to compensate, they try to recover these costs through fees, conveniently ignoring the long-term savings benefits of accepting online payments. And when you’re a government entity and have a monopoly on vehicle registrations, for example, you don’t have to worry about competition driving your costs down.
4. Fees for using coins.
When is a dollar not worth a dollar? When one of those dollars is in coin form. The tried-and-true method of daily saving, the coin jar, has taken a hit. There was a time you could take the jar to the teller in your local bank and they would deposit the money dollar for dollar into your account. You probably still can, but not without nasty looks from the tellers who don’t want to count your change.
In the United States, coins are considered inconvenient. People would rather walk around with bills neatly folded in wallets than with change jingling in their pockets. When faced with a collection of change, people are interested in exchanging their coins for dollar bills. Bank tellers don’t want to deal with this, so in many circumstances, they’ll take a fee out of the exchange, usually only if you don’t have an account at that particular bank. Coin exchange machines in stores, like CoinStar, take a cut from the exchange as well.
If I give someone $30 in change, I expect to receive $30 back. Coins are not worth less than bills.
5. Account inactivity fees.
Investment banks are going to earn money off you in whatever method they can. Brokers love active traders; for the most part, the brokers earn money with every transaction. Transaction fees are expected and even tolerated. Many discount brokerages offer plans that offer a monthly fee in exchange for leniency with transaction fees, but for the most part, profits are derived from those who buy and sell often. It’s no surprise that most investment advice agrees that investors should not trade often, as fees and bad timing hurt your long-term investment returns more than anything else.
You have to be careful when you buy and hold in certain investment accounts, however, due to inactivity fees. If you aren’t adding to your balance or making any number of other changes to your account, some brokers will charge you an inactivity fee. This fee could appear on a monthly, quarterly, or annual basis.
When investment accounts are able to change their account terms on a whim, an account you’ve had for years, just sitting and growing in value over time, could begin to leak its value. This is the primary reason it’s worthwhile to read every notice you receive from your banking institutions, regardless of how unimportant the envelopes might appear. It’s also a good reminder to keep your address current with all of your accounts, reducing the chance you’d inadvertently miss a notification.
What banking and investment fees do you find the most annoying? How do you avoid fees?
Published or updated October 10, 2012.