How To

A Banker Reveals How Banks Try to Take Your Money

photo: Andres Rueda

Greetings. I’m Dan and I’m a banker. Don’t worry, though: I quit my job at a big bank years ago.  I know how the financial system works — the details, the tricks and traps — and I’m going to let you in on some industry secrets. By the time you’re finished reading, you’ll know a lot more about the games banks play and how to beat the system — or change it.  Powerful stuff.

First up: product terms that change without notice.  You read your entire bank and credit card terms and conditions every time they’re updated? Bravo. You belong to a small group: just 3% of Americans. But even if you do, you might not realize that there are ways banks can reduce the value of what they provide without ever formally letting you know.  Here are the three most common ways banks give you the bait and switch.

Beware of Falling Interest Rates

Remember that awesome interest rate you first got with your savings account?  You’re probably not getting it now.  The practice of raising interest rates and dropping them (knowing most customers won’t notice) is so common that it has a name within the industry: pump ‘n’ dump.  Even friendly banks do it.  As the worldwide head of ING Direct was quoted in a 2002 INSEAD case study: “People are sleeping. We wake them up with very dramatic advertising, they switch their money and then they go back to sleep.”

The Onus of the Bonus

Based on my company’s research, over one quarter of Chase, American Express, and Discover customers think they’re earning 3%-5% on everything they buy with their credit cards.  How could you not be fooled when some of their marketing is so misleading.  This line is from American Express: “Earn up to 5% cash back on virtually everything you buy.”  Research shows that the phrase “virtually everything you buy” will overwrite the phrase “up to” — kind of like a mental white-out.  You’re left thinking you’re earning 5% almost all the time even though the base earning rate is a mere 0.5%.  Don’t get me wrong — “up to” rates and earning 3-5% bonuses can really boost your earning power.  But it falls to you determine exactly how much the bonuses are worth based on how you spend.

Anyone know what a mile will be worth next year?

Once upon a time, 25,000 airline miles used to get you a round trip ticket, a bag of peanuts, and space on the plane for your bags (for free).  How the world has changed.  Every year, as part of the annual budgeting process, big banks and travel companies review the costs of their rewards programs.  And every year, the goal is explicit: reduce costs without changing how customers earn rewards, so the program still feels the same.  The result?  You might still be earning the same number of miles but the majority of rewards tickets now cost twice as many miles and include a booking fee.  Over time, almost all rewards programs change.  Make sure you know if you should make a change, too.

The moral of this story?  Take a few minutes every year to see how good of a deal you’re getting from your financial services providers.  If you don’t like what you see, make a change.  Fire your bank.  Unfriend your credit card company.  They’re changing the terms of your relationship and not letting you know.  Let them know you noticed.

Dan O’Malley is CEO and co-founder of PerkStreet Financial.  He was formerly an executive at one of the country’s ten largest banks.  Unlike other bankers, he welcomes your opinions and invites you to email him directly at domalley @ perkstreet . com.