Modern Banking

There have been a lot of stories lately about some of the practices banks engage in to make profits from their individual customers, including this one from David Atkins yesterday.  It reminded me of this story by Felix Salmon about how "overdraft protection" works - which is is also instructive of the tactics modern banks engage in.

I came face to face with this fact when I was out on Friday and found myself with no cash attempting to make a purchase at a store that only took cash (you would be amazed how many of these stores exist in NYC).  No, they didn't take cards there, but they did have an ATM in their store.  And I discovered it cost me $5.00 to make a withdrawal from my checking account using that ATM - a $3 charge at the machine itself, plus a $2 charge by the bank.

Can someone explain to me why I can make a purchase using my debit card at a store that accepts cards with no fee, but I have to pay $5 to withdraw cash?  [Never mind - I know.  It's because the merchant pays the fee, not the cardholder - but really, we pay it anyway, right?]

This story comes on top of employers increasingly paying their employees by giving them debit cards.   And of course, states are now issuing debit cards as tax refunds.  It seems like everyone, even our government, is taking the opportunity to part us from our money.  The American way, right?

Atkins points out that one of the things that the banks are doing now is trying to remove the tax exemption for credit unions.  Now I think this is a good idea - I don't like the idea of tax exemptions anyway.  But I understand the idea behind the exemption for credit unions, which is that they are owned by their accountholders.  People forget that, years ago, many banks were so-called "mutual" associations, meaning that they were owned by their accountholders.  The Bailey Building & Loan in the movie "It's a Wonderful Life" is an example of a mutual financial institution.  In the late 1980s and 90s, there was a wave of "de-mutualizations" with many banks converting from mutual to stock companies.  I know - I was personally involved as a tax lawyer with working on these transactions.

In the long run, this has been a huge mistake as a policy matter.  Both mutuals and stock companies have boards of directors and CEOs and other officers.  The big difference is who are they working for. In a mutual, they are working for their accountholders - who are both their customers and owners.  In a corporation, the directors and officers owe their duty only to their stockholders.  The de-mutualization rage had the effect of totally changing the incentives of the bank executives in how they do their business.

The same thing happened in the insurance companies of course, While there are more mutual banks than mutual insurance companies these days (mutual banks tend to be smaller, community banks), there are a number of very large insurance companies, including Northwestern Mutual, Mutual of Omaha and Nationwide.  Nationwide advertises the fact that they are owned by their policyholders, something I think should be a bigger selling point than it is.

As a side note, it is apparently - and shockingly - possible for a bank to use the word "mutual" in its name even though it is not a mutual bank.  The notorious Washington Mutual was a stock corporation, not a mutual association, having converted from a mutual in 1983.