Photo: caribb

Passengers, fasten your seatbelts and take out your wallets.  The airlines are finding new ways to make money: by charging fees for anything from a checked bag to an in-flight pillow.

Airlines call these charges “ancillary revenue opportunities.” With the industry looking at global losses of $9 billion to $11 billion for 2009, carriers are desperate for new income.

To be sure, fees are nothing new for the airline industry. Charges for overweight luggage and air-to-ground phone calls have been around forever. But these days, the airlines have invented so many fees that the journey from Point A to Point B has become a revenue opportunity with a captive audience.

First, there are the sometimes unavoidable “gotcha” charges for itinerary changes or to speak to a human when booking a flight. Some airlines, such as Spirit Air, are even starting to impose a “convenience” fee for purchasing a ticket with a credit card. Others, like British Airways and AirTran, have recently implemented a fee to reserve a seat in advance.

There are also what you may call “sucker” fees: paying for Web access, buying miles to get an “elite” status, or purchasing meals that are hardly worth eating.

And, admittedly, there are some worthwhile “convenience” fees. Some carriers will let you buy your way into the fast lane at security, a one-time pass to the lounge, extra legroom ($20 on JetBlue) or early boarding ($10 on Southwest).  In February, American Airlines announced it would charge a $50 fee for ticketed passengers to fly standby on an earlier flight, following the lead of Delta, US Airways and others.

Desperate for Revenue

The recession’s impact on travel demand is only the latest reason airlines are desperate for extra revenue. Since 9/11, airlines have been hit by one crisis after another, not the least of which is the roller coaster in jet fuel prices. Non-passenger/non-cargo revenue is one way for airlines to hedge their bottom lines against plummeting ticket sales and skyrocketing costs.

According to a February report by the Centre for Asia Pacific Aviation (CAPA), the airline industry expects to generate about $58 billion in ancillary revenues in 2010: double the ancillary revenues it generated in 2001.

US carriers alone anticipate earning an extra $4 billion this year just from new baggage fees. According to the CAPA report, “we are just at the start of the movement to monetize services and products passengers used to receive as part of the ticket price.” While seat sales dropped 22% in the third quarter of 2009, the baggage fees collected by the US airline industry doubled.

When United Airlines announced last October that its quarterly losses were (only!) $63 million, analysts cheered and complemented the airline on bringing in new revenues from ancillary fees. Allegiant Travel Company, parent of Allegiant Air and Allegiant Vacations, actually reported ancillary extras were accounting for 33% of average total fares in their third quarter. JetBlue, currently earning an average of $17.50 per passenger on ancillaries, promises to “continue to look for opportunities to meet the needs of our customers.”

The Holy Grail of Revenue Treasure

 US Airlines’ passenger baggage fee revenue collection (1Q 2005 through 3Q 2009; USD ’000)

Source: Centre for Asia Pacific Aviation and US Bureau of Transportation Statistics.

All five of the big US carriers (American, Continental, Delta, United, and US Airways) hiked baggage fees to celebrate the New Year, according to a January report by Jay Sorensen, president of the airline consulting firm IdeaWorks.

“Major airlines now clearly consider baggage fees the holy grail of revenue treasure,” Sorensen wrote. “It’s easier to announce a single nationwide fee increase and avoid the messy details of market-by-market fare hikes. The design of online shopping sites makes these increases invisible to consumers; the price matrix is limited to air fares.”  

As for the add-ons, in a speech at the World Low Cost Airline aviation conference in Barcelona, Nico Bezuidenhout, CEO of South African low-cost carrier Mango Airlines told his peers there are compelling reasons to take ancillary revenue opportunities very seriously: Airline customers are pre-qualified as having disposable income, demonstrated trust in the airline’s brand, and they have predictable travel and purchase behaviors.

“Not only do airlines have substantial insight into who they carry, but air travel typically represents the first purchase activity in the overall travel procurement cycle, followed by destination content, hotels and cars bookings—all of this serving to provide airlines with the ideal contextualized sales opportunity,” Bezuidenhout told the audience.

Avoiding the Fees

There are ways to avoid at least some of those fees. Elite frequent fliers and passengers flying first or business class, for example, generally are not charged baggage fees.

Knowing what your airline will ding you for can help you plan ahead. Pare down your packing to fit in a regulation roll-aboard—and be sure to leave any TSA-prohibited items at home.

Before you go the airport, know your rights. Let your representatives know that aviation consumer protection is important to you. And by all means, whenever you can, patronize the airlines that aren’t trying to nickel and dime you to death. Currently, Southwest and JetBlue aren’t charging for first bags and Continental still serves meals in coach as part of the ticket price. Military personnel are exempt from a lot of these charges, too.

David Sefton, director of west coast operations for travel agency Altour points out that checked baggage fees can be purchased at a discount from most carriers as part of the online check-in process. But he warns that those fees are typically non-refundable if you change your itinerary. Carriers will refund a checked bag fee if a flight is cancelled but not necessarily if baggage is delayed due to mishandling.

Frequent fliers might consider an annual baggage fee pass. Last year, United Airlines introduced an annual-fee option to check in up to two bags per flight without a fee. Up to seven other people booked with you can check their bags as well. The introductory price for the pass is $249, according to Sefton. “Considering that United charges $20 for the first bag and $30 for a second bag, a family of four checking six bags would break even after just one round-trip,” he says.

The same goes for seat fees, which are typically non-refundable and non-transferrable. United has an annual Economy Plus pass for $349 to get privileges you used to have to earn with miles. “This option entitles a traveler and a companion to confirm economy plus seats for an entire year, Sefton says. “Considering that the round-trip cost to purchase Economy Plus seats separately for a party of two from Los Angeles to New York is around $228 total ($57 x 4 segments) it may make sense if you travel more than once a year.” Some may even be better off signing up for United’s Mileage Plus Access Visa card , which has a hefty $275 annual fee, but gives you free Economy Plus seating, in addition to lounge passes and other bonuses.

Now Departing: Fee-Disclosure Legislation?

Maybe JetBlue can get away with cutting prices to the bone and then selling extras, but a premium carrier can only do that so much before suffering brand damage and ultimately generating momentum for stiffer passenger rights legislation.

Last year, Sen. Robert Menendez (D-N.J.), introduced the Clear Airfares Act, which would require airlines to provide a full breakdown of all fees and surcharges that a passenger may incur during their flight (such as baggage, meal and pet fees) before they ask for personal and payment information.  On the Senate floor, however, that legislation has yet to take off.

Steve Barth blogs about work, play, society and politics at Reflexions.

envisionGood

With the holiday gift giving season behind us and the annual consumer electronics show a few days away, the thoughts of gadget lovers everywhere are turning to ways to make room for the latest and greatest.

New devices appear faster than we can keep up with them. But that also implies rapid extinction and devices become obsolete almost as soon as we unwrap them. As a result, our lives—and our landfills—become encrusted with the sediments of consumer choice.

Omar Shahine likes to stay up-to-date. For example, he recently upgraded his Canon camera by replacing the model he purchased less than a year ago. But Shahine helped to pay for the new camera by selling the old one for about 65% of the original price.

Reuse, it has been said, is the best form of recycling. Between 100 and 125 million cell phones are replaced or discarded in the United States every year. Extrapolating from a 2007 study by iSuppli, we are approaching something like a billion used cell phones in the USA, with about 10% being dumped in landfills and about 37% being dumped in bottom drawers.

Unlike Shahine, many of us hang on too long to gadgets we no longer use. We may intend to turn them over in one way or another, but we hesitate, unsure of what to do. Essentially we have three choices: sell, donate or recycle.

Cashing In

The obvious outlets for used electronics are auction or classified sites like eBay and Craigslist. If you have the time, you’ll probably negotiate a higher price for your old items, in part depending on how many other sellers are offering the same items at the same time.

Sites like Gazelle trade some of the profit for a lot of the hassle. Gazelle claims to be the nation’s largest “recommerce” company and to have found new homes for 20,000 used mobile phones, digital cameras, MP3 players, gaming consoles and other devices. To use the site, you search to see if your device is accepted, then answer a few questions before the site approximates its value. If you accept, Gazelle will send you a postage paid box to send in the item for approval and payment.

As with many things in life, timing is everything. Gazelle is what Shahine used to get $264 for his Canon G10 (original price $408). “The key is to sell something while it is still considered pretty up-to-date, and stay current on the technology curve. I can usually recoup about 50-75% of the original cost that way. If you wait too long the thing you are trying to sell isn’t worth anything (and you spent too much time using old technology),” Shahine explains. “A lot of people I know buy new gadgets and just keep the old one lying around until it is of no use to anyone and they have to give it away or recycle it.” Likewise, when the iPhone 3GS came out, he was able to sell his 3G to finance most of the new purchase.

Donate and Deduct

Selling used electronics generally involves proving the that devices still work. Another option is to donate your old electronics to charity and take the deduction on your income taxes. Generally, electronics such as cell phones, PDAs and digital cameras depreciate at about 20-30% annually, so it doesn’t pay to procrastinate. (Check with your accountant before you do this.)

Organizations such as Recycling for Charities (RFC) accept mobile phones, PDAs, Mobile Pocket PCs, iPods, digital cameras, etc. regardless of their working condition. RFC will refurbish and sell the device if possible and recycle if not, then donate to charity about half of their return of the item’s fair market value at the time. Values ranging from $1 to $100 for a phone, camera or digital player. Be sure to deactivate the service associated with the phone and erase the address book. RFC promises to further electronically wipe the phone’s memory.

Save the Planet

Even if it’s not worth selling or donating, recycling your devices has two benefits (not counting making more room in your drawer). The first benefit is keeping toxic substances—especially from batteries—out of landfills and seeping into groundwater. Mobile handsets and other devices can also be mined for renewable materials from plastics and glass to gold, silver and coltan. Coltan is an extremely rare mineral found primarily in the Congo and demand for it is linked to both fueling bloody conflicts and decimation of the mountain gorilla population in the region.

More and more manufacturers and retailers are accepting eWaste to earn your business. Depending on which state you are in, manufacturers include Apple, Canon, Gateway, HP LG, Motorola, Nokia, Panasonic, Samsung and Sony Ericsson. Retailers including Best Buy, Costco, WalMart and Radio Shack. AT&T, T-Mobile, Sprint and Verizon all have recycling programs, as well. Recycling may even be worth a credit towards your next purchase.

Keep a Spare

Finally, while this is supposed to be about getting rid of old phones and other gadgets, I’d recommend keeping at least one lying around. Especially if you use a GSM-based service like T-Mobile or AT&T, it’s easy enough to swap your SIM card if your current phone ever goes bad—or to drop in a local SIM card to use while traveling overseas. And even if you don’t use it, I guarantee you’ll get a call from a friend or relative asking, “Hey do you have an old phone I can borrow?” And then they’ll owe you one. That’s value.

Steve Barth blogs about work, play, society and politics at Reflexions.

Photo: schottjohnson

UK Banks Vote to Phase Out Paper Checks—Will the US Follow?

Somewhere in my files, there are photos of me holding up those giant checks that foundations love to hand out to charities. It was 1995 and I was raising money in Los Angeles for victims of the Great Hanshin Earthquake that leveled Kobe in Japan. Over the course of a few weeks, I lugged shopping bags full of checks—more than 10,000 donations amounting to millions of dollars—over to our accounting firm. The giant checks were great, but the bags of small, individual donations were like offering of personal prayers written on each slip of paper.

I’m not sure I would have felt the same sentimental satisfaction holding up a printout of a large electronic debit.

This week, the British banks governing the UK Payments Council decided to phase out their check clearing system by October 2018. In effect, they set an expiration date for the use of paper checks (or “cheques” as they prefer). In a statement, the group’s chief, Paul Smee, noted: “There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement.”

Like letters of credit, demands for payment and bills of exchange, bank drafts can trace their history to Roman times, when checks were known as “praescriptiones.” Paper drafts analogous to today’s checks were in use in the Islamic world in the 9th century and as early as the 12th century Templars honored pilgrims’ checks from one chapter house to the next. In England, clearing houses have had responsibility for settling checks since the early 1800s (before that they were often cashed in coffee houses).

Bankers complain that many British retailers don’t accept checks anymore, that young people don’t even have checkbooks, and that it’s costing them as much as a pound (about $1.63 today) to process every check. But the decision certainly has its critics—especially advocates for the elderly and small business owners. On one hand, a generation uncomfortable with electronics will be forced to risk carrying and handling more cash. On the other, mom and pop stores have one more disadvantage against giant competitors (some of whom are starting to act as banks themselves). The move will also put the “unbanked”, who have to pay fees to cash checks but also lack access to accounts capable of electronic payments.

Will the US Follow?

The cost of cash keeps going up while the cost of using credit cards and electronic payments keeps going down. More retailers accept credit cards than checks these days. But while US banks also worry about the costs of handling cash and checks, they aren’t likely to echo the UK decision any time soon. Yes, paper checks are increasingly rare in high-tech countries—whether advanced Scandinavian nations or developing/modernizing regions such as Africa—but the US doesn’t rate as high-tech when it comes to personal finance (present company excepted of course). It has lagged dramatically in the modernization of its financial traditions, such as implementing electronic payments, even compared to Britain.

Instead, US banks such as Bank of America and Chase have been investing in new ATMs that make it easier for customers to deposit checks without envelopes, deposit slips or extra keystrokes. In fact, a law known as “The Check Clearing for the 21st Century Act,” which took effect in 2004, made it easier for banks themselves to settle checks by exchanging scanned images electronically instead of physically managing and transporting paper.

The use of paper checks in the US may have peaked, but they aren’t evaporating in proportion to the explosive rise of electronic payments. According to Federal Reserve statistics, the number of checks written in the US has fallen—but only slightly—from an average of 112 per person in 1971 to 102 in 2006. While the number of checks written in the UK is only a third today of what it was in 1990, the decline isn’t quite as stark here in the USA. British check-writing peaked in 1990 at about 10.8 million drafts. Compare that to some 70 billion written annually in the US by 2001.

Perhaps one reason they aren’t falling more significantly here in the colonies is that we all seem to have so many more monthly bills and accounts these days? Inevitably some of those new store credit cards, nifty home utilities and specialist medical providers still have to be paid by check. And credit cards, electronic debits and automatic payments are easier but often come with service fees, interest charges or “gotcha” surprises. Also, many government institutions, landlords, utility companies and others still preclude (or penalize) electronic payments. It can cost hundreds of dollars to use a credit card to pay your income taxes. Meanwhile, many of us hate walking around with cash anymore, and wouldn’t want to keep more around for house cleaning and home repairs.

The federal government isn’t likely to encourage a return to an uncounted cash economy, either.

A Generational Issue

Using paper, plastic or electronics instead of cash is a generational issue, too. McKinsey & Co. found in a 2006 study that 54% of consumers still pay most of their bills by putting checks in the mail. Another study by Forrester Research found that 71% percent of people who don’t like to pay bills online would rather write checks and receive paper statement for their record keeping. The biggest group of such “traditionalists” is retirees, but regardless of age, most people consider paper to be safer for both security and accounting reasons. (Although a younger sampling might point out that a paper check reveals a lot of personal information, such as address and driver’s license number.)

The idea that electronic fund transfers are more prone to fraud may be more than just perception. As of last year, 76% of US banks reported losses due to debit fraud compared to only 56% losing money to check fraud.

Once, crossing a downtown parking lot on a rainy night, my eye caught two pieces of paper blowing across the concrete. They were checks, that appeared to have been endorsed, deposited and apparently in the process of being transferred from one institution to another. One was for only pennies, but the account belonged to a well-known celebrity. I didn’t recognize the name on the other, but the amount was for something like $55,000. The security department of the bank where the checks had been cashed took little interest, so…

Steve Barth blogs about work, play, society and politics at Reflexions.

Photo: CoffeeGeek

Are you a coffee snob? Do you sniff at drip? Are you willing to endure a day of caffeine headaches and jitters rather than sip a subpar brew? And most importantly, is this addiction/affliction costing you more money than you can afford? These days a lot of people are telling you to get your caffeine fix at home rather than spending $10 a day at carts and counters.

“You probably stop at your local coffee shop at least once a day and grab your latte, cappuccino or Americano,” says sales manager Darren Ruffel of Whole Latte Love (WLL), a consumer-oriented e-tailer based in Victor, NY. He estimates, for example that if you average two venti mochas daily at $4.27 each, that comes out to $59.78 a week or more than $3,100 a year on take-out coffee, not to mention the cost of gas, parking and waiting in line.

“Your coffee habit is costing you a lot of moola!” he cries. WLL has definitely seen an uptick in machine sales since the economy crashed. “More people are investing in home equipment to save money and have good quality coffee at home.”

A shot in the dark

The heart of a gourmet coffee drink is the espresso shot, flavored with milk-stuff, sugar-stuff or spice-stuff or blended with ice or foam. It was Achille Gaggia who invented the modern espresso machine in 1938, which uses pressure to extract the best flavor and aroma from ground beans.

The signature of a perfect shot is the crema, the ephemeral golden foam of oils, proteins and sugars floating on the ebony slurry of extra virgin extraction. You only get that when properly selected and roasted beans are properly ground and pressed and then properly heated and pressurized water is forced through the coffee during the proper 20-25 second window.

How hard is it to get a professional-quality cup at home? “Not hard at all. With the right equipment, beans and knowledge you can create a great cup of coffee in your home—in most instances, a better cup than at cafes because you can customize your drink to your own personal tastes,” Ruffel says.

Types of espresso technology

So assuming that five or six cups before 8am will keep you going all day (really?), what kind of investment are we talking about? These days several categories of espresso machines have been especially popular: super-automatics, semi-automatics and single-serves. (Price ranges provided by WLL).

Super-Automatic ($499-$3299): Essentially a coffee-making robot. Put whole beans in the hopper, fill the water reservoir, and a superautomatic grinds and pumps perfect cups of espresso or crema coffee at the touch of a button. Then the mechanism expels the spent puck into an internal bin and readies itself for the next shot. Some have LCD screens or manual adjustments; many have self-frothers to foam the milk.

Semi-Automatic ($59-1999): Upgrades from the traditional pump machines. You’ll need to grind your beans first (use a burr grinder) and tamp it into the portafilter, but then the machine takes care of temperature and pressure.

Single-Serve ($89-499): A new market entry. These machines usually feature space-saving designs and deliver a single, precise extraction from an inserted capsule or pod. Many manufacturers also make tea, hot chocolate and flavored coffee pods.

Does it pay?

At my house we bought a Gaggia Synchrony Compact. Our preferred way to enjoy coffee is to express about 2-4oz of coffee and then add an ounce or less of milk or creamer to cut the acidity of the coffee. In Spain and Latin America, this is often called a cortado.

We paid $650 in 2005, so our beloved little robot just turned four. Over that time, this superautomatic has required very little maintenance and only weekly cleanings. It grinds and brews perfect cups of crema at the push of a button, and then cleans up after itself. After four years at an average of 5-6 cups per day, the machine itself has cost us less than 7 cents per cup.

Besides the coffee-maker, of course, you will be spending money on coffee beans. We use Peet’s Espresso Forte blend, which we buy fresh for $12.95 per pound. Using—believe it or not—the IRS’s estimate of 60 shots per pound, we’re paying a little more than 21 cents per cup. So for about two bits per cup, we’re enjoying the best coffee I’ve ever had anywhere in the world.

Compare that to about $1.45 for simple shot of espresso at Starbucks. If we invest the time in steaming some milk or adding a flavor, our investment only goes up by a penny or so. Compare that to Ruffel’s $4.27 venti mochas.

Coffee culture

Unless you work at home, this works best if you get your whole caffeine fix first thing in the morning. (Or maybe you need to invest in one at work too?)

But what about the social aspects of the coffee house? Dropping in on your crowd, taking a break from a stressful workplace? Coffee houses have become the quintessential “third place” between work and home, but Ruffell suggest that space has gone virtual, anyway.

“With the increased world of Web 2.0, we find that people are making coffee at home and sharing the ritual of creating unique drinks on social networks like Facebook, forums and blogs,” he says. “Individuals are spending more time at home and enjoying good quality coffee with neighbors and friends.”

Steve Barth blogs about work, play, society and politics at Reflexions.

Photo: iChris

By last summer, our tiny house was bursting at the seams from a decade of bargain shopping, vacation souvenirs, outgrown clothes and upgraded gadgets and appliances. We had already suffered the separation anxiety of several runs to Goodwill when our neighbors invited us to join other families in a communal yard sale.

Based on past experience, I was loathe to the idea. I didn’t think the earnings would be worth the hassle, but we had too many valuable items to simple give them away to charity and too many items for the hassle of auctioning them off one at a time on eBay.

By the time it was over, we had a fanny pack full of cash, really nice suntans, a lot more room in the house, and a list of tips for what to do and what not to do. And clearly, we’re not the only ones: Craigslist ads are up by more than half and garage sale permits have more than doubled according to some sources.

There’s a lot of conflicting advice out there from professionals, so we’ll tell you what they say, but also what worked for us.

Cathy Pedigo, author of the book, “How to Have Big Money Garage Sales!” claims you can more than triple your profits if you follow her advice, which she tests personally. One weekend she’ll host a garage sale using other people’s tips and tricks; the next weekend, she sets it up her way, based on 25 years of personal experience. The results:

Their way: less than $200

Her way: more than $1,000

Maybe you’ve never worked at the mall, but you’ve been there, no? The main thing to remember for a successful yard or garage sale is to use your shopper’s instincts, Pedigo says.

Whether your intention is to make money (why not?) or just to get rid of stuff, experts, confirmed by personal experience, will tell you to treat your sale like a business in terms of merchandising, marketing and pricing. In our case, even though our primary motivation was a massive reduction in clutter, we still earned more than enough to compensate for the hours we put in.

Merchandising

Allow plenty of time for preparation. We started weeks ahead of our sale, cleaning out cupboards, dressers and storage spaces to identify everything we wanted to sell before cleaning and sorting it. But come our first Saturday, there were still cartons’ worth of stuff we forgot to put out. As a result, we repeated our sale the following weekend based on lessons learned.

Next, we underestimated the amount of time it would take to carry everything out to the driveway and arrange it before the horde of early shoppers (often professional) who inevitably ignore your start time. Swap meet dealers will paw through boxes before you’ve even put them down and offer insultingly low prices. But they don’t care if things work, buy books by the box and snap up antiques without scrutiny. They will drop cash and be gone before you know it.

So we improved our system by loading everything into tables inside the garage so they could be hauled out in place first thing in the morning—and starting work before dawn.

All the experts agree that organization is important. Sort by “department” too because each shopper has things they are looking for. Place items back into their original boxes or keep original tags for that “like new” look. An extension cord lets people test appliances and electronics. Hoard plastic shopping bags.

Tables are important because shoppers shouldn’t have to do too much bending and squinting. We placed lower quality or lower price items beneath tables in boxes. All clothes were hung on hangers across the bottom rail of the raised garage door (with tarps hung to block access to the rest of the garage). Flashier items went out by the street to catch the eyes of passing motorists.

Use a front-facing fanny pack as a cash register and make sure you have enough singles and change before you start.

Finally, like a store, manage your risk. Check local laws to see if you need a permit. Have liability coverage in your insurance and check for sprinkler holes and other hazards in your sale area. Don’t sell anything that has been officially recalled—such as kid’s toys. Never put something truly valuable out on a table if it could be easily shoplifted. Jewelry or watches don’t take up a lot of room, so they can be grouped on the table in front of your “cashier.” Keep valuable items in front of you, or put out their empty boxes until someone asks to see them. Keep your house doors and gates locked. Next Page.

This second question should be just as important to you because of the ways the overall US and global economies can affect you personally, regardless of how well you’re being served on your own accounts by the financial industry. This is about keeping your job or finding a better one, access to credit for a new home or a new business, the performance of your investments, the safety of your retirement, the chance your taxes will have to bail out more companies, the level of inflation affecting your purchasing power, etc.

There has been considerable financial deregulation for several decades and ripping up the rules of the road got us into big trouble,” White House economic advisor Austan Goolsbee told MintLife in a briefing last Friday. “Now we’re pushing back against that trend in a way that is smart—not excessive—with more aggressive and robust oversight.”

Minimizing Risk

All of these variables come down to the issues of risk, reform and regulation being debated in Washington this year. After decades of deregulation and don’t-get-caught policies, the Obama Administration and Democratic lawmakers are promising a new era of adult supervision.

“We can’t protect people from losing money if they make a mistake,” he warns, but adds, “We have to have transparency, make the rules clear and get rid of unfair predatory practices.”

Goolsbee points to the need for better oversight in three ways:

1. Some risky activities are missed today because they slip between the supervision of seven different financial regulatory bodies (see below). Subprime mortgages are an example, because only one-quarter to one-third of the loans were being made by regulated deposit-taking banks. The rest were being made by unregulated finance companies.

2. Other risky activities aren’t supervised because those regulatory bodies were set up before these new practices were devised and new laws aren’t keeping up with complicated new innovations in the market. One example is credit default swaps (essentially insurance on debt, or insurance on the insurance, and so on until you don’t even know what you are insuring) which sunk Lehman Brothers and AIG and started the dominos crashing.

3. And finally, new types of financial institutions are growing to gigantic proportions, but then failing through risky activities without a way for government to step in, renegotiate contracts, or liquidate bankrupt company or customer assets when investors’ value goes to zero. For example, the FDIC can do this with banks, but the government had no legal authority to seize Lehman the same way. Without the authority to “resolve” these institutional failures, the government can only throw good money (yours) after bad (theirs).

The Great Depression demonstrated that even private institutions could become “too big to fail” and pose risks to the whole system. So what Goolsbee and the Obama Administration are looking for are ways to improve regulation to avoid those “systemic” risks. Goolsbee divides the issue of systemic regulation into twin tracks: one is how to deal with systemically important or threatening institutions; the other is how to think about emerging systemic threats in the form of new instruments. That is, watching for new financial innovations, such as derivatives trading or credit default swaps that might pose risks to more than just those that invest in them.

Goolsbee admits this is tricky. Not all financial innovations will be good, but not all have to be good for society. “You can’t ban a financial instrument because somebody might make a bad bet and lose their money,” he explains. “The point of the administration’s plan is that we should be concerned about those financial innovations that pose risks to the whole system.”

Centralized Reform

Under current laws, the financial industry is essentially supervised by seven government bodies: the Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Federal Trade Commission, Office of the Comptroller of the Currency, and Department of Housing and Urban Development. New proposals call for consumer-related protections to be streamlined and consolidated under one umbrella at the CFPA. The Federal Reserve would continue to set monetary policy and keep responsibility for monitoring day-to-day systemic threats. Meanwhile, the administration also wants a new broad-based “systemic risk council” of financial regulators to watch for emerging or long-term systemic dangers.

“The council is designed to keep an eye on the horizon for the next thing like credit default swaps, to say ‘this is menacing to the system’ and apply higher capital requirements or assign it to be regulated according to some method,” according to Goolsbee. In other words, watching “things rising up that are not within the existing regulatory apparatus, where there is some identification that there are threats to the system, not just to the individual institution.”

“It is imperative that there be a central authority so that there is one set of standards applied across the whole marketplace,” he adds. “The president is committed to addressing issues like systemic risk and systemically important institutions. Somebody should be on them all the time, making sure they have enough capital so they can’t threaten the whole system.”

Again, Goolsbee cautions that even a forward-looking panel can’t regulate based on what every financial innovation might mean for society. You can’t require someone with a financial innovation to document how it would benefit the real economy. “For financial innovations that are brand new that are not systemically threatening in any way, it’s extremely difficult to document the impact of a specific financial product on productive behavior. I don’t know how we would put that in practice,” he explains. “How would we evaluate that? But the standard that is achievable by regulators is to ask, ‘does this product pose a systemic threat to the financial system?’”

“We have got to reestablish rules of the road that form a core of stability for the financial system. That means we can’t allow huge loopholes on anything that is fundamentally about systemic risk,” he says. “So if somebody talks about fundamentally changing rules to allow big systemic risks again that aren’t under anybody’s jurisdiction, or that can squeeze between the regulatory cracks, the president isn’t going to allow that to happen.”

The White House is calling for new “rules of the road” on three levels: protections for individual banking and credit consumers against predatory lending practices, abusive credit card terms, and unfair charges and fees; protections for individual investors against unclear terms and undisclosed risks in their portfolios; and protections for workers and taxpayers against another catastrophic economic meltdown caused by irresponsible practices.

Steve Barth has worked internationally with banks, governments and NGOs on microfinance and economic development. He blogs at Reflexions.

This morning, Austan Goolsbee briefed MintLife on the Obama Administration’s plans for financial industry regulatory reform in advance of President Barack Obama’s remarks Friday afternoon, particularly about the proposed Consumer Financial Protection Agency (CFPA). Goolsbee is staff director and chief economist of the President’s Economic Recovery Advisory Board, a member of the Obama’s Council of Economic Advisers and otherwise a University of Chicago economics professor.

For free markets to be fair and effective, they depend on two things: free flows of information and free choices for all parties. A comprehensive package about consumer protection and industry accountability will address both, Goolsbee says. The Obama Administration is essentially calling for more accountability from three parties: from the industry, from government itself and from you the consumer.

Industry Accountability

In terms of protection, the White House is calling for new “rules of the road” on at least three levels:
• Protections for individual banking and credit consumers against predatory lending practices, abusive credit card terms, and unfair charges and fees;
• Protections for individual investors against unclear terms and undisclosed risks in their portfolios and retirement savings—and protections from conflicts of interest by their investment advisors;
• Protections for citizens and taxpayers against another catastrophic economic meltdown caused by
irresponsible and unregulated financial practices and “innovations” .

Goolsbee points to a number of unfair practices that would be prohibited by new rules enforced by the CFPA: eliminating bait-and-switch teaser rates on credit cards, by forcing companies to honor their offers and commit to them for the specified period of time; preventing companies from retroactively raising interest rates on existing balances; no “gotcha” tactics to earn late charges, such as moving deadlines to early morning in payment due dates to early mornings (before mail deliveries); or no payment processing tactics to clear large items before small ones in ways that maximize overdraft charges.

Government Accountability

The CFPA would consolidate authority that has previously been fragmented among disparate efforts, making it easy for abusive or risky business practices to slip—or be slipped—through the cracks between seven different financial regulatory agencies. Having too many separate agencies “allowed certain actors in the financial system to wiggle their way between the regulatory cracks or to exploit those agencies that had the least amount of oversight,” he says. For example, Federal Reserve standards on housing lending by banks didn’t have jurisdiction over the other two-thirds of the subprime mortgage market.

Consolidating and streamlining oversight is also designed to improve the accountability of government in its role of preventing financial innovations or undercapitalization risky enough to endanger the whole system “with somebody who is accountable and whose job is to make sure consumers are being protected in the financial sphere,” Goolsbee adds. “There will be one person sitting there whose job it is to protect both the system and protect consumers.”

Consumer Accountability

But new rules have to apply to consumers as well. Accountability from institutions has to be complemented by more responsibility from consumers: not buying more house than they can afford, not charging more purchases than they can afford, and not making risky investments that they can’t afford to lose.
For example, on the transparency side, Goolsbee says the White House wants to see contracts and term sheets presented in “plain language” (despite his PhD in economics, he says even he can’t understand his credit card agreement). But such clarity is wasted unless customers make time to read their agreements before signing.

“Consumer protection is not intended to remove accountability from consumers. People still have to read their bills and read before they sign up for things,” he adds. “And there’s nothing wrong with borrowing money, but if you don’t pay it back there should be a penalty.”

Will rates and fees go down?

Not necessarily. Will there be fewer surprises in your monthly statements? Theoretically. Will new rules stay ahead of financial innovations that can bring down the economy? Let’s hope so.

“Part of our reform effort involves putting in place new safeguards that would help prevent the irresponsibility and recklessness of a few from wreaking havoc on our entire financial system. We want to close gaps in regulation; we want to eliminate overlap; and we want to set rules of the road for Wall Street that make fair dealing and honest competition the only way for financial firms to win and prosper,” President Obama said later in the day. “But a central part of our reform effort is also aimed at protecting Americans who buy financial products and services every day — from mortgages to credit cards. It’s true that the crisis we faced was caused in part by people who took on too much debt and took out loans they couldn’t afford. But my concern are the millions of Americans who behaved responsibly and yet still found themselves in jeopardy because of the predatory practices of some in the financial industry. These are folks who signed contracts they didn’t always understand offered by lenders who didn’t always tell the truth. They were lured in by promises of low payments, and never made aware of the fine print and hidden fees.”

Political Battles Ahead

The briefing was an economic transaction in its own right. Goolsbee was offering insights, but also asking for help from the largely liberal political bloggers on the call. Only Web-based activism, he says, can counter political vulnerability to special interest lobbying.

“Interest groups associated with the financial industry have decided they want to block or seriously change the effort of the administration to reestablish rules of the road and some kind of stability to the financial system,” Goolsbee said. “So the president is looking to amp up public pressure on what changes are needed. Just going back to the status quo, which got us into the worst financial crisis since 1929, is completely not an option.”
Expect the financial industry to war against these regulations with a lobbying campaign that’s even bigger than the one being waged over healthcare reform. Obviously, Republicans will fight Democratic proposals tooth and nail, but likely Democrats will fight among themselves, too. Undoubtedly, so will the various executive branch agencies fight for control of the new agency.

If so, this doesn’t bode well for effective regulation, does it?
A fact sheet (pdf) on the Consumer Financial Protection Agencyis posted on the White House website.

Flush with their $700B in bailouts from taxpayer dollars, are your banks showing you the love?

Quite the contrary. Banks continue to increase their non-interest fees and charges as a way to mitigate the huge investment and loan fees suffered as a result of the financial crisis and by all indications this is unlikely to change any time soon, with or without an economic recovery.

Banks like to point out that these charges are completely avoidable as long as you pay bills on time and don’t spend any money that you don’t have. Whether you take the banks at their word or not, there are indeed ways to avoid fees such as
unnecessary service charges, insufficient funds (NSF) and overdraft charges, late payment fees or getting your interest rates raised.

With new regulations looming in Congress, America’s financial institutions are paying close attention to squeezing every dime onto their bottom lines, so you need to pay attention too.

So when was the last time a $1.25 espresso actually cost you almost more than $100 when it triggered a cascade of bounced payments?

A new study by Bankrate.com shows banks are continuing to boost bottom lines at your expense by racking up record fees and charges—before new Federal Reserve rules, expected by year’s end, force them to reduce or eliminate such penalties.

Every time you bounce a check, overdraw with a debit card, dip under a minimum balance, or use another institution’s ATM, banks clean up. The cost of careless banking has risen to an all time high. Based on a survey conducted in August, Bankrate found that, compared to last year:

· NSF charges on bounced checks increased 2.1% to an average of $29.58.

· Tiered overdrafts, which increase charges at the second or fifth bounce over 12 months, now average $33.88 and $36.19. (Some banks admit to processing the largest of multiple payments first to rack up more charges.)

· ATM surcharges rose 12.6% to an average of $2.22. (Banks increasing the fee outnumbered those reducing 7-to-1.)

· Monthly service fees for interest bearing accounts were up 5% to a record average of $12.55.

· On a positive note, Bankrate found that 76% of non-interest bearing accounts are now free of monthly service charges or minimum balances.

“Take steps to avoid fees,” suggests Bankrate senior financial analyst Greg McBride. “Note any fees and balance requirements of your account, request a link between your checking and savings accounts, and keep track of the available account balance so that your money stays your own.”

The FDIC calculates banks will earn as much as $43.6B from non-interest income related to deposit accounts in 2009, which apparently doesn’t even include non-network ATM surcharges. According to economic research firm Moebs Services, 44.5% of banks and credit unions earn more on non-interest revenue such as fees than on interest income.

Bankrate’s Laura Bruce suggests six tips to avoid getting stung by fees:

1. Visit bank websites to investigate your options

2. Choose a checking plan that has only the features you need

3. Know your balance and don’t risk a bounce

4. Plan for cash needs and only draw cash from your bank’s ATM

5. Consider interest checking only if it’s high-yield and you can maintain the required minimum or meet other requirements such as direct deposits

6. If necessary, connect checking to overdraft protection with a savings account or credit card. (Otherwise, be sure to tell your bank to turn off automatic overdraft protection on you ATM and debit card transactions).

Banks claim that mechanisms such as clearing checks against insufficient funds amount to a service rendered—and indeed, it’s only about 25% of Americans who “take advantage” of these services. On the other hand, the FDIC characterizes such charges as unregulated lending that often costs consumers the equivalent of thousands of points of annualized interest. On that basis, even the typical interest charged by payday lenders pales in comparison.

Last month, a number of major banks, including Wells Fargo, JPMorgan Chase, and Bank of America already promised to scale back their assessments for overdrafts, especially when the shortfall is less than $5 or $10. But as one Daily Mail writer quipped when UK banks finally lowered their rates last year (from overdraft charges as high as £38), “If charges are fair, then why lower them?”

Steve Barth blogs about work, play, society and politics at Reflexions.

Now that taxpayers have bailed out the banks, they are on your side, right? After all you’re not just a customer anymore, you’re an owner. But perhaps their responsibility to you as a “shareholder” is overwhelming their responsibilities to you as a customer?

President Barack Obama met banking executives at the White House Thursday where he demanded clarity, transparency and an end to what he termed as “abusive” rates and fees, especially from financial institutions bailed out by the Trouble Asset Relief Plan (TARP). “There’s a new sheriff in town,” says Ed Mierzwinski, consumer program director for US PIRG, the federation of state public interest research groups. “And we’re excited and encouraged. President Obama stepped in and said he wants stronger rules passed by Congress.”

On Capitol Hill, both the US House and Senate are pushing to pass consumer protection bills sooner, rather than later, such as the Credit Cardholders’ Bill of Rights (HR 5244).  According to the Office of House Speaker Nancy Pelosi, the key protections of the bill are:

• Ending unfair or arbitrary interest rate increases
• Letting consumers set hard credit limits to stop excessive over-limit fees
• Stopping penalties for cardholders who pay on time
• Requiring fair allocation of consumer payments
• Protecting cardholders from due date gimmicks
• Preventing companies from using misleading terms and damaging consumers’ credit ratings
• Shielding vulnerable consumers from high-fee subprime credit cards
• Barring issuing credit cards to vulnerable minors

The problem, say Mierzwinski and other consumer watchdogs, is that the new rules’ penalties won’t be applied until July 2010, so banks are using the economy as an excuse to raise as much money as possible through these tactics before that happens. “We think that’s wrong, dishonorable, unfair and disappointing,” he adds.

It’s not just credit card rates and fees that are going up and getting more complicated. The rules, services and charges associated with loans, savings and checking accounts are changing too. By some accounts, a number of large and small banks are now deriving as much as half of their income from fees and penalties.

For example, there was mostly outrage when Pacific Capital Bancorp, offered tax-refund anticipation loans, at annualized interest rates of more than 100%. Or when Wells Fargo introduced Direct Deposit Advance Service to access funds in anticipation of electronic deposits for a fee of $2 for every $20 advanced. That amounts to an APR of 120% (although the stated point of the DDA is to tide you over only until your paycheck clears). In essence Wells Fargo’s service is similar to a “payday loan” which is considered predatory enough to be banned for use by military families.

The banking industry insists such services are used entirely at the customer’s discretion. They consider these fees and penalties to be fair since it is the customer’s responsibility to keep track of balances and due dates. Consumer watchdogs argue that statement information is intentionally confusing and that due dates are arbitrarily changed so that customers will miss consequences and can be penalized for late payments.

The American Bankers Association (ABA) is the leading trade group representing the majority of large and small banks in the US. Nessa Feddis, ABA vice president and senior counsel emphasizes that none of these sometimes-controversial services fees and charges are forced on consumers. Nor should financial business be expected to provide services for free. “What people really want is for services to be free. But obviously there are fixed costs. We don’t pay a loan officer less salary to make a loan of $100 instead of $100,000. The credit report still costs $25 either way. Even if it is a short-term loan, there are fixed costs. So you don’t have to be a mathematician to figure out why the annual rate is high if the loan is less than annual.”

“The teller has to be paid; their benefits have to be paid. Cash has to be counted, sorted and protected. You can’t escape those costs,” Feddis points out. “Banks that have taken government loans can’t repay those loans if they operate at a loss.” And she says that TARP banks have already returned to the government-and taxpayers-about $2.5 billion in the form of dividends, according to ABA calculations of public information.

Regarding the rising fees, as well as climbing credit interest rates, Feddis compares the trend to insurance companies raising premiums based on risk and losses across the portfolio. “There is a certain collective aspect to it. In credit cards, all borrowers pay, in part, for the losses resulting when other borrowers don’t repay. You can’t lend $10 to 10 people, get $90 back and be around to lend again.” In that way she says, rising rates are similar to rising insurance premiums.

“I don’t cry for the banks, because so many of those people have paid interest on top of interest for so long that even if the principal is never repaid, the bank did well by the loan,” Mierzwinski counters. “You can make good money in credit cards. The problem is that over the last five to seven years they’ve been making bad money on top of the good and they got caught.”

“Everybody needs to make money, but if your basic business model is to make money on tricks, traps and gotchas, then your business model has been declared by the Federal Reserve Board of Governors unfair and deceptive,” Mierzwinski adds. “Banks can’t lie, cheat or steal anymore.”

Steve Barth blogs about work, play, society and politics at Reflexions.