Banks' squeeze play: Low rates, higher fees
Savers start feeling the pinch of lower interest rates and new ATM fees. But banks fearful of losing customers will try to temper the shake down.
NEW YORK (CNNMoney.com) -- As recently as five months ago, consumers had the banking world at their feet.
At the time, they enjoyed attractive interest rates on certificate of deposits and online savings accounts, which paid annual yields well in excess of 5%. Not to mention the free checking accounts kept ATM fees at a tolerable level.
Those days, however, are now a distant memory.
Within the last two weeks alone, yields on CDs and top-yielding money market accounts have dipped by half a percentage point, after recent moves by the Federal Reserve to cut interest rates drastically.
And some of the harder hit financial institutions are also quietly ratcheting up fees to compensate for business lost as a result of the credit crisis.
While banks will most likely take a very measured approach about where they squeeze, it seems almost certain that savings-minded consumers will feel the pinch.
"I'm sure those types of discussions are going on in bank after bank," said Jaime Peters, an equity analyst at Morningstar.
Fee for all
So far, banks have spared their own customers, deciding instead to stick it to the other guy.
Last month, JPMorgan Chase (JPM, Fortune 500), whose reach extends beyond its New York City hub into such states as Illinois and Ohio, followed suit. The company also announced last week that it would now charge certain account holders $2 for using non-Chase ATMs, instead of $1.50.
Others have resisted piling on extra charges. Wells Fargo (WFC, Fortune 500) said it did not have plans to raise the $2 fee it charges non-customers, while the company said its overdraft and insufficient funds fees have remained unchanged over the past year.
Fee increases, however, are nothing new. According to Federal Deposit Insurance Corp. data, banks have steadily raised the fees they charge their customers to use out-of-network ATMs or for bouncing checks. The banks were trying to cover the cost of doing business, while also preparing for situations like the current downturn.
Banks may be tempted to charge more for basic banking services given the large provisions they have set aside for loan losses, said Jeanne Capachin, vice president of banking and insurance at the research firm Financial Insights.
"There is still some elasticity in pricing," she said. "[They] have to get more revenue in the door - that is one way to do it."
But such a move could prove dangerous as banks risk losing customers they worked so hard to win over and the future business that comes along with it, said Gerard Cassidy, an analyst with RBC Capital Markets.
Banks place such a heavy emphasis on the concept of "cross selling" or offering various products to existing customers in order to drive business. That means if you open a checking account, your bank is hoping it can sell you on a mortgage, a credit card or even open up an IRA.
"Banks have to calibrate carefully how much customers are willing to tolerate," said Cassidy. "Each increase in fees, a certain percentage of customers will go away."
Interest rate pinch
While the Fed's recent rate cuts are aimed at keeping the economy out of a recession, they are also reaching into savers' pockets.
Since September the central bank has lowered the so-called Fed funds rate, which affects how much consumers pay on credit cards, home equity lines of credit and auto loans, five times from 5.25% to 3%.
As a result, consumers looking to park their cash no longer enjoy a wealth of high-yielding options.
A one-year certificate of deposit is yielding an average 2.75%, down from 3.76% in September, according to Bankrate.com.
Even banks that scored multitudes of new customers by offering online savings accounts with high yields are now scaling back on the sky-high rates they once offered.
The rate on EmigrantDirect's online savings accounts, which yielded 5.05% a year ago, has fallen to 4.05%. ING Direct has slashed the rates on its offering by more than a full percentage point to 3.40% from 4.50% a year ago, according to Bankrate.com.
Those declines, however, are far more moderate than the decline in the Fed funds rate or Treasury yields.
Banks will do anything to get, and keep, deposits, noted Greg McBride, senior financial analyst at Bankrate.com.
"The fact is those yields have moved at a much more reserved pace reflecting banks continued thirst for consumer deposits," said McBride.
But with yields on the downswing and competition for deposits robust, banks may look to gimmicks and giveaways to attract new customers..
Bank of America, for example, has relied heavily on its "Keep the Change" program: The bank rounds every debit card purchase to the nearest whole dollar and transfers the difference into a savings account.
In fact, giveaways may become more attractive to consumers than slim differences in lousy account yields, said RBC Capital Markets' Cassidy.