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David & Goliath: How Customers are Sticking it to the Big Banks

(Daniel Leninger)

Last November, Mint reported at length on the many ways that banks and creditors were sticking it to consumers in anticipation of the The Credit Card Accountability Responsibility and Disclosure Act of 2009 (set to take effect in February.) Among the various unsavory practices were sudden interest rate hikes, strict enforcement of overdraft fees, “due date roulette”, reduced credit limits and universal default – all of which will soon be prohibited. And despite often being depicted as helpless and uneducated, consumers have begun retaliating by hitting the big banks where it hurts – at their bottom line. Slowly but surely, people are concluding that it is simply not worth transacting with institutions that mistreat them, and are beginning to take their business elsewhere instead. Consumer rebellion against banks has taken several forms thus far. Let’s take a look at some of these:

Withdrawing Money

Perhaps the most direct retaliation to bank mistreatment is the simple removal of money by consumers from their bank accounts. To be sure, some of this activity owes to the pathetic amount of interest currently being paid out by most banks. In the UK, for instance, TheMoneyStop reports that consumers are, “…withdrawing billions due to poor returns” on their savings accounts. In the United States, however, banks are increasingly seeing depositors withdraw their money due largely to the types of shoddy service discussed earlier. Indeed, many consumers are apparently resolved to withdraw their money from the “Big Four” banks (Citibank, Chase, Wells Fargo and Bank of America) even if it makes no visible difference to the overall industry. TheWeek.com quoted a disgruntled customer as saying, bluntly, “…maybe I can’t make Chase feel my pain — but I’ll feel better about myself in the morning.”

(AMagill)

The bitterness that some customers feel toward their banks is hard to exaggerate, and the data substantiates the anecdotes. According to Rueters, a J.D. Power & Associates survey found that, “…only 35 percent of customers polled said they are highly committed to their retail banks” during 2009, “…down from 37 percent in 2008 and 41 percent in 2007.” Bank of America and Citibank were named specifically as receiving low marks in customer service, perhaps providing an impetus for consumers to withdraw funds.

Switching to Smaller, Local Banks

Another outlet for the frustrations of disenfranchised consumers has been switching to smaller, local banks. Despite blogger Felix Salmon’s remark that changing banks, “…is hard, and people are lazy”, the Huffington Post reported on January 8 that its viral, video-driven Move Your Money campaign has resulted in millions of dollars being transferred from big banks to smaller, local competitors. Among the beneficiaries of the growing exodus has been Trustco’s Albany, NY branch, which, “…had 30 new accounts opened just Thursday, almost all of them new customers saying it was their way of ‘fighting back’ against larger banks like Citi and Chase.” Nor are unwealthy consumers the only ones making a stand. Albany’s NEWS10 television station reported that, “…one of those new accounts [at Trustco] is seven figures.” And far from being a local trend, Trustco administrative vice president Robert Leonard states that, “…the trend is the same at their branches in Westchester and in their Florida branch.”

(Betssssssy)

Additionally, Financial-Planning.com reports that since ‘Move Your Money’ kicked off on December 29, “…daily Web traffic has more than tripled on the National Association of Federal Credit Unions’ CULookUp.com, a credit union locator site.” While this is an admittedly crude proxy for new account openings, NAFCU President Fred Becker said, “…it is a good indication that bank customers are looking for alternatives.” The campaign’s two week-old Facebook group, actively for all of two weeks, already boasts a following of over 20,000 members. And even in Michigan (whose economy is so bad that one might expect consumers to sit tight regardless of poor bank treatment) the Lansing State Journal finds that, “…about 59,000 people joined one of Michigan’s 335 credit unions in 2009 through the end of September – the most in more than five years.”

Heightened Interest in Online Banks

Dissatisfaction with big name banks has also led to rising interest in Internet-only, “direct” banks. The trend was foreseen as far back as April 2009, when BankTech.com reported a study by Tower Group predicting that, “…the amount of money deposited with direct banks will double by 2012.” Monetarily, such a prediction equates to, “…$350 billion in deposits held by direct banks by 2012, up from $160 billion last year.” Without question, some of this growth can be attributed to consumers becoming more comfortable with online banking in general. However, in many respects, the benefits of Internet-only banks dovetail perfectly with the biggest reasons people are unhappy with their current banks. Since the costs of operating direct banks are less than ten percent than those of brick and mortar banks, consumers benefit from fewer and less expensive fees. Some online banks (such as EBank) not only refrain from levying their own ATM fees, but also reimburse any such fees that other banks charge – the very same day.

(Mint)

Additionally, direct banks have acquired a reputation for paying higher rates of return on savings deposits than traditional banks. Bankaholic‘s report on the top 50 money market rates and high interest savings accounts found two direct banks (Capital One Direct and Ally Banking) in the top three at 1.58% and 1.49%, respectively, as of January 11. With larger banks often paying less than 1% interest on savings deposits (in addition to nickel and diming their customers to death), it’s hardly surprising that direct, online banks are attracting more people into the fold.

Outright Refusal to Pay

The more radical among consumers are actually refusing to pay what banks and creditors say they owe. An exemplar of this tactic is Ben Pavone, a California lawyer who, “…told Bank of America in a letter last week that he refuses to pay off his credit card debt until the bank lowers his interest rate”, according to the Huffington Post. Furthermore, should Bank of America try to tarnish Pavone’s credit rating, the feisty lawyer vows, “…he’ll sue ‘em.” Reportedly, Pavone’s dissatisfaction with the bank stemmed from his credit limit being reduced when Pavone requested that it be raised. Nevertheless, the lawyer now considers himself to have been, “…squeezed for cash” and is “…eager to argue in court that your interest rates are unfair within the meaning of various state and federal statues, and anxious to point out that you ‘had’ to cut my credit limit from $32,000 down to $30,000 at the same time you were borrowing billions from the federal government and paid your executive bonuses in full.”

It’s important to realize what is at stake when lawsuits are discussed. Even an attorney must endure myriad forms, procedures and paperwork (not to mention an investment of time) to move a lawsuit through the legal system. It is a far more complicated process than many people believe. The fact that some are not only willing to refuse payment but fight for their decision in court suggests that even sophisticated and successful individuals are growing tired of bank industry games.

(Quaziefoto)

Pavone says he drew inspiration for his decision from Ann Minch’s “Debtors Revolt” campaign, which itself grew out of Minch’s frustration with Chase Bank. Upon being informed that her credit card interest rate had zoomed to 21.24%, Minch responded, “…are you stupid? Chase Bank, are you stupid?” in a YouTube clip that has drawn over 50,000 views since its release. Even personal finance guru Suze Orman has lent her moral support to the Debtors Revolt. When Minch appeared as a guest on Orman’s TV program, she revealed that she, like others discussed earlier, had, “…closed her savings and checking accounts with Bank of America and put her money in a local bank.” Before departing the topic, Orman declared herself as emphatically, “…on the bandwagon of credit unions” and other smaller institutions which treat customers ethically. The Debtors Revolt is hardly an isolated occurence, and has spurred countless imitators to carry on what Ann Minch started.

Short & Long Term Implications

The financial sector is in such a state of upheavel that it is difficult to make iron-clad predictions about its future. However, consumer response to bank practices of the last 12-18 months indicate that patience is running low for the various money-squeezing tactics that were once the norm. Aside from the the looming Credit Card Accountability Responsibility and Disclosure Act and other regulatory pressures, consumers are now applying discipline personally, through the market, by taking their deposits to more upstanding and efficient institutions. It is not difficult to imagine a resurgance in community banking (coupled with increased use of online direct banks) spelling reduced marketshare for the “big four.”