Why Do Banks Charge What They Charge, Pay What They Pay, And Generally Act Like Banks?

vault door of the Credit Lyonnais bank

This article may contain affiliate links. If you use them, thanks! I use the money to run this site - more info

I hope you find this epic guest post as informative and engaging as I did.  If so, please share it on your social feeds. If you’re not familiar with ARB’s unique & entertaining perspective on finance, I encourage you to visit his site.  Take it away, ARB!

Angry Retail Banker logo
Raargh! I am ARB, the Angry Retail Banker!

Just recently, our good friend Jack published an article in which we received an unexpected money lesson from everyone’s favorite crude but intelligent animated series, South Park.

In the article, Jack posted a video clip from an episode in which Stan tries to open a bank account, and the banker mismanages the funds so bad that it’s lost in an instant.

I truly recommend that you watch the video before Viacom takes it down for aaand it’s gone. {Aaaand it’s back. Joke ruined}

So in the article, Jack relays various subtle lessons from the video about how banking works. And in it, he says this:

“Banks being banks, they will push you out of useful accounts into what’s best for them…”

I read that line, and I read it again. And then I got angry, being the Angry Retail Banker, so I decided to take action.

I broke into Jack’s house, tied him up, and decided to write a guest post here on Enwealthen. That intro up there? He wrote it under duress (you’d be amazed what people will do when I threaten to take over handling SEO for their blog).

So while I still have control over my blood boiling rage, I want to take the time to educate you all on banks. Specifically, why banks push you into certain accounts, charge you certain fees, and just generally act like banks.

How May I Charge You Today?

Maintenance fee? Did my account need a tune-up?

Did anybody ever see that one TD Bank commercial where the banker at the evil other bank calls in a maintenance girl to explain to a customer why maintenance fees are a good thing? She comes over with this fan-like contraption and starts yammering on about “checking chambers” and “deposit friction.”

People get charged maintenance fees monthly. And that’s fine with me per se. You get charged, you get charged. You don’t, you don’t. But what I think is bad for customers (and for the banks, too) is that people don’t understand why they are charged maintenance fees.

And I’m not talking about how to avoid maintenance fees (“I got charged a maintenance fee because my account has less than $1500”). No, I mean why maintenance fees exist.

I’ve had a friend actually ask me why he should have to pay the bank a fee just to have an account with them. After all, don’t they already have his money?

Yes and no. They are the custodians of his money, but they don’t have his money. He has his money.

Many, many years ago (December 2014, my very first article actually), I wrote all about the misconceptions on how banks make money. And in it, I wrote that one of the biggest misconceptions is that your deposit is the equivalent of “giving” or “paying” the bank money.

It’s not. Not as long as it can be withdrawn by you at any point. It’s less “top line revenue” and more “infrastructure.”

From there, remember that you don’t just have a place to store your money. The bank isn’t just a place where it holds all your money in a vault.

It provides service. It provides advice. It provides protection. It provides investments and insurance. And in a post 9/11 world, it provides law enforcement and counter-terrorism assistance.

There are tons of costs to running a bank. You have tellers to process your transactions and bankers to service your account and provide you with advice. Call centers are there to take your calls, sometimes even late at night and on holidays. Checks that you write are being processed (and 18 billion of them were processed in 2012), as are bills that you pay online.

Speaking of which, you have access to your account online, over the phone, and through a mobile app on your smartphone. You have in your pocket a small, plastic card that you can use anywhere you want to make purchases without the use of cash. Everyone from branch staff to call center employees to IT specialists are constantly providing security to prevent your account information and money from ending up in the wrong hands, even monitoring your debit card usage for suspicious activity.

The list just goes on.

And you don’t pay for any of this stuff.

Think of other businesses. Doctors charge you for every visit, right? Your barber charges you every single time you get your hair cut. The grocery store charges you for the food that Sausage Party shows is actually alive and suffering greatly (you monster). But you can do your transactions with a teller, sit with a banker, write out checks, use your debit card, and so forth and never see a bill come in the mail for it all.

The bank is providing you services. So it’s not unreasonable to expect service fees. They are maintaining your account. Is it that crazy to expect maintenance fees?

And I know what you’re thinking: “Man, that ARB is hilarious and is the absolute best personal finance blogger out there, hands down.” And you’re right. But I know the two other things that you’re thinking:

If these maintenance fees are so important to the bank and the deposit amounts aren’t, then why do the poor people get charged the fees and the rich people don’t? Shouldn’t the rich people with the high balances get charged more maintenance fees for getting more services?


How can maintenance fees be so important? Don’t banks make money by loaning out our money at a higher interest than they are paying us on our deposits? Certainly these fees aren’t that necessary.

Those are all great questions, future ARBonauts (I’m trying to think of a good fan name for my legions of followers).

Let me address them both.

Fees – both maintenance and otherwise – are extremely important revenue sources for the banks now that interest rates are at their all time lows and staying there for the foreseeable future. With rates so low, the banks’ profit margins on loans are lower than ever. They are taking in less money, costs are as high as ever, and still have to provide you with all those wonderful free services that you come in and scream at me about when they don’t work perfectly right now.

But the monthly maintenance fees are more than just an income source, and this is where the concept of those service fees being waived for high balance account holders comes into play. They are the teeth of a “soft promise.”

You see, banks have capitalization requirements set by law. They must have certain amounts of cash on hand in order to make the loans that they need to make (the loans that, again, are both their primary source of revenue and seeing profit margins shrivel up like… like… man, I can’t think of a non-dirty joke there). The more cash they have on hand from your deposits, the more money they have to lend.

So they need you to deposit your money there. And they need you to keep it there. So they make you promise to keep your money there.

Some accounts constitute “hard promises.” Certificates of Deposits, for example. You open up a CD, you promise to keep your money in the bank for X amount of years. You signed off that you would keep your cash in that CD for five years. In return for a higher interest rate, of course. So if you break that “hard promise”, the bank penalizes you by taking away your interest and even some of the principal that you put in. That’s right, folks, you can lose money on a bank CD. First person to say the word “FDIC” gets slapped, by the way.

But what about those regular accounts? You never said anything about not taking any money out of your checking account for five years, right (if you did, you are a moron)? That money is fully liquid, so the bank must find a way to make you keep it there.

Hence the maintenance fees. If you open an account with a minimum of $2,000, then you’ve given a “soft promise” to keep at least that amount there daily. Go under and there is a penalty in the form of a monthly fee.

Of course, when a more affluent customer comes into the bank, they want them to give a “soft promise” to keep more than that in there. So the bank goes “Hey listen, Bob the Customer. If you ‘promise’ to keep $100,000 instead of $2,000, we will throw in free bank checks, money orders, checkbooks, and wire transfers. Sound coolio?”

Bob responds in kind with some other outdated 90’s slang term, and there you go.

Don’t worry, by the way. Bob’s fees if he goes below that higher minimum are actually higher than yours to offset the costs of all those now-free services he’s receiving.

Did you just charge me money for not having money?

Next up is the overdraft fee.

I don’t think I really need to tell you what an overdraft fee is, but I can tell you that they are one of the largest sources of fee income on the part of the banking industry. Last year, the banks took in about $35 billion in fee revenue.

Now everyone and their mother has an opinion on banks’ overdraft fees. They should be eliminated entirely, they are just there to gouge more money from unsuspecting customers, they should be more transparent, they should be limited to six per year, they are punishments by the bank for using your own money, etc.

Let me start off by saying, yes they are considered a source of income from the banks. Yes, they are something extra they can charge you for. Remember, they are a for-profit business. It’s the same as a burger joint charging you an extra $2 for two strips of bacon. Why do we think the banks are any different?

But are these fees justified?

As far as I’m concerned, an overdraft fee is a loan. A no credit check, no income verification, high interest spot loan. Whether extending what’s essentially no credit check loans is a good thing or not is subjective, but ultimately they are charging you a fee for a service.

The service in question being the ability to use their money on the spot for whatever reason you want instead of your own.

Just remember that the next time you want to sit in front of me and tell me about how the banks are stealing from you. The bank is using their money to cover your purchases when you don’t have the means to pay for it. And sure, you’ll tell me “But I’d rather not have the banks do that! If I don’t have any money, then I don’t spend it!”

Well, before you went ahead and did the thing you said you don’t do, you signed paperwork asking for the bank to cover your transactions. Please don’t tell me something along the lines of “Well, if I knew what I was signing, then I never would have signed that paper!” I explain the overdraft coverage on every account I open; almost 60% of you, after weighing the pros and cons, opt in.

Whew! Okay, now that that’s off my chest, let me just say that while I wouldn’t exactly complain if the banks lowered their overdraft fees to $20 or less, I think the current state of things is okay. Not great or perfect, but okay. The overdraft fees are high, but they’re supposed to be high. I don’t want to throw the word “punishment” out because I don’t think it’s the banks’ or anyone else’s place to punish you for poor money management, but again, you are spending someone else’s money.

On the spot.

With no credit or income verification. And no collateral.

What were we all expecting?

Interesting bit of trivia in case you all find yourselves on Jeopardy. The concept of overdraft was not a post-Recession creation to offset the loss of the banks’ income from lending operations. It actually came from an agreement between merchant William Hog and Royal Bank of Scotland in 1728, when his bills came due before payments to him were made which left him in a jam. He became the world’s first recipient of cash credit from a bank, or in modern-speak, the first person to ever overdraw his account. More banks and their favored business customers jumped on the bandwagon, and the influx of cash credit from the banks helped build the economy. After the Industrial Revolution, this feature began to become something easily extended to regular customers, until technology and scale led the state of overdrafts to what they were today.

So I’m just sayin’, the banks create products and services to meet the demands of their customers just like any other business and industry. We asked for these overdraft features (and I can tell you from experience that people want them, agree to them, and use them), so we can’t complain when banks charge us and make money from a potentially risky business endeavor.

Though we can – and I have – challenge the way banks approach certain business practices.

Anyhoo, let’s move on.

Why can’t you refund this one fee? You’re a multi-billion dollar corporation!

I get this sort of thing often. Why can’t we just do you, the customer, a favor and refund your fee?

“What’s $12 to a multi-billion corporation?”

This is true. And I can go on about things such as how small fee refunds add up over time to large losses of revenues for the bank, but that would not only be silly but kind of hypocritical coming from a banker who has refunded fees for customers simply because they asked nicely.

No, instead, we are limited on how much we can refund in fees because we have to be mindful of the branch’s budget.

Yes, that’s right. The branch’s budget.

You see, most people believe that when we refund fees (or open accounts, or do anything really), that those fees are just part of the big fat mountain of cash that is “the bank’s money.”

But things don’t work that way.

Each bank is like a franchised corporation, with each branch having its own budget with monies laid out for different purposes. Fees are part of the branch’s income (or whatever business line in question is charging the fee) and used for everything from payroll to payment slips. And one of the budget lines is fee refunds.

That’s right, each branch has a specific amount allocated towards returning fees to customers.

And it’s not billions of dollars. It’s a lot less.

Not so little that we don’t have flexibility to work something out ever, but the fee refund budget is small enough that the multi-billion dollar bank you’re sitting in can’t just give you back $350 in fees. It may not be a large amount to the CEO, but you’re not talking to the CEO. You’re talking to the branch employees, and to them, it is a huge amount regardless of how you want to justify your refund (“bank error” is what you usually go with… if you want us to talk down to you and tell you to manage your money better before still not refunding you anything).

If you’ve ever gone to a branch, “proven” (I use that term lightly) that a fee that you’ve been chosen was due to an employee’s error, and then been sent either to the branch where you opened your account or the branch where the error took place instead of receiving your refund back then and there, this is why. If you are telling me that someone in another branch told you XYZ and XYZ is not actually true, there’s a good chance I’m not going to refund you the fee from my branch’s budget. Let the branch that supposedly made the error debit their ledger.

I actually did this the other day.

A customer claimed his check bounced due to the teller at another branch giving him bad advice and incorrect information about his account balance (after seeing funds from a previous check available on his online banking, he asked the teller if his funds were available, the funds were available, and the teller told him his funds were available, and thus it’s a bank error because oh my effing God people are this stupid and yet we allow them to vote and wonder how Donald Trump is a major presidential candidate). I told him to go to the other branch to negotiate a fee refund, and then when he left I put a note on his account documenting the conversation so that the other branch would see what happened and be ready for him.

But either way, it wasn’t coming out of my branch’s budget.

Anyhoo, yeah, branch budgets. Onto the next?

How May We Be Of Disservice?

Do any tellers work here?

There’s truly no experience like walking into an old timey bank in modern times. You know, the branches that were designed and built before 2000?

You’d walk in and see fifteen teller windows. Thirteen would be empty.

And of course, you’d get to listen to at least one person on line try to start a riot, screaming at somebody to “Get more tellers out here!” as if the bank was just hiding a reserve of tellers in the teller closet or something. They’d then fight with the overworked teller whose window they approached, threatening to take their money elsewhere because they don’t understand why threatening to close your account doesn’t work and why there will never be more tellers out there.

Branches are expensive. I mean, really expensive.

How expensive? Well, let’s just say that according to Mitt Romney (okay, according this article from Bain & Company, which has no relation to Romney’s Bain Capital), “Every 100 closures in North America, for instance, might free up $40 million to $60 million in annual operating expenses.”

Branches are expensive and becoming obsolete.

The most important segment of customers right now are the Millennials, being the youngest segment of bank customers from whom the financial industry will see more business over the coming decades than any other generation. And guess what? 33% of Millennials say they won’t need a bank in 5 years.

In plain English? Well, that article says it best when it says that bank tellers will become the telephone operators of the 21st century. So pretty much, they ain’t putting any more tellers on the window for you. So untwist your panties and start using online and mobile banking.

And that’s just how things are.

Physical business operations always have more costs and overhead than digital. I own my own business on top of working full time as a licensed banker (my business is not in anything finance related) that does physical and online sales, and I’ll tell you from experience that the physical side of things is more costly and has less income potential than the digital side.

The smart banks—the ones that will survive and thrive thirty years from now—are the ones that are pushing everyone towards mobile deposits.

The mystery of the blocked debit card

If the angriest of the angry customers out there are to be believed, debit cards come in two distinct flavors:

  • The type that the bank always seems to block no matter how often you do the same transactions, and
  • The type where unauthorized transactions seem to constantly happen no matter how many times you are issued a new card

And of course, we blame the “idiots” in the bank’s debit card department for either intentionally giving customers a hard time or not providing enough protection (Pro-tip: Asking questions like “I don’t understand; isn’t the bank supposed to be protecting my money?” is a sign that you may have brain damage), but that’s because we all overestimate how debit cards are monitored.

The bank doesn’t actually know if a transaction is fraudulent is not, and it certainly doesn’t block transactions intentionally for the sake of blocking them. Instead, automated systems that track your debit card (and credit card) usage detect whether a transaction is most likely fraudulent. But “most likely” is the key phrase here because it’s literally impossible for the bank to actually know if it’s a fraudster using your card.

Obvious as it sounds, the bank is monitoring your card on a “best guess” basis. People don’t realize that. They really don’t.

In the article I just posted:

“[Card companies] look for patterns and search for anomalies,” says Kurt Helwig, president and CEO of the Electronic Funds Transfer Association. “If you typically use your card in the D.C. area, and then suddenly it’s being used in Eastern Europe, they’ll flag that. Or if you usually keep your spending under $1,000 a month, and then there’s suddenly a purchase for $6,000, it will raise flags,” he says. The card provider will then call the customer and ask him or her to verify the purchases.’

So why did your purchase on sexymidgets.com end you up with nothing but a blocked card and no videos of those naughty dwarves your nether regions were starving for? Well, either the transaction was with a known comprised merchant or for something you rarely use the card for, or Jesus stepped in personally in order to keep your soul clean.

But what about those of you whose cards are “always” being blocked?

Again, each bank’s algorithms are different, and each cardholder uses their card differently. But things like using your card multiple times despite it not working, using it at multiple ATMs in the same day, trying to withdraw or purchase items for much higher amounts than you usually do, or using merchants whose systems are known to have been compromised in the past make your card much more likely to be blocked.

“But then why do unauthorized transactions go through!?” you wonder aloud at your computer screen. “Why is it that when a transaction is actually unauthorized, the bank suddenly doesn’t catch it?”

I’ve had plenty of people complain to me that their card was always getting blocked, but when a fraudster actually stole from them, the transaction went through fine with no block on the card. I’ve also had people coming in complaining loudly about their blocked debit card, only for those complaints to fade away when we see that the bank successfully blocked an unauthorized transaction.

But the fact of the matter is that the algorithms used to determine the validity of each transaction are not perfect. They are simply the best that we are going to get with today’s technology.

Do you know how many debit card transactions occur daily?

According to this page, there were 35 billion Visa debit card transactions between June 2014 and June 2015.

Visa debit card transactions.

That doesn’t include MasterCard, American Express, Discover, and those bizarre Russian cards that you lovelies bring me from time to time (that you are not getting a cash advance on). Of course there’s bound to be mistakes! I’d like to see you monitor all those transactions!

Of course, if you’re one of those idiots that thinks that your card gets blocked because the bank is out to get you personally, then there’s just no helping you, mentally speaking.

Dammit, Jim, I’m A Salesman, Not A Banker!

So as I mentioned before, one of the reasons I’ve forcibly taken over Jack’s blog decided to write a guest post here on Enwealthen is because of the assertion that bankers try to push you out of useful accounts and sell you stuff designed to make the bank money at your expense.

Attention banks and bankers: If that’s what you are doing, then you are doing this all wrong.

When a good banker working for a bank that doesn’t push impossible sales goals on their staff talks to you about opening up this or that account, it is just as much in your best interest as it is the bank’s.

Unfortunately, there are banks that do push those impossible goals on their staff, right down to the tellers. People, for the life of them, can’t figure out why the teller is trying to sell them a credit card they don’t want or need.

I understand that the bank needs to cross-sell all its products to as many customers as possible. After all, stuff like debit cards, direct deposit, and online bill pay are what’s called “sticky products” in the banking world. A sticky product is something that makes it more difficult for a customer to switch banks; someone with only a checking account could and would leave the bank in a heartbeat. Meanwhile, someone with a wide range of bank products and services would not only find it difficult to switch, but shouldn’t want to because the bank has been their one-stop financial service center (why would you open every single type of account with us if you hated us? And having all these products allows us to help you in all areas of your financial life rather than just your ability to buy food at Burger King).

But that last part should be – and when banks are properly run, is – the key. A customer should want the products that a banker is selling because those products should be something that benefits the customer as well as the bank. Sometimes more than the bank.

A well run bank should instill that mindset into their employees. Cross-selling must be beneficial to the customer and not just the bank. And to any high level bank big shots out there reading this, trust me, you will get more sales and less problems taking this approach rather than just forcing a credit card on every man, woman, and child and hiding your overdraft coverage behind false names that have the word “protection” in them.

Wait, I think I went off tangent here. Let me get back on track.

The whole question is about whether a banker is pushing you out of useful financial products and into something that is financially destructive in order to make the bank money.

Despite what some people may think we do, the opposite is true. When we speak to you about a financial product and really push it, it’s because we see that you will benefit from it financially. Hell, maybe you’ve been hurting yourself (without even knowing it) because you didn’t have these features or accounts.

Over on my blog, I’ve spoken in the past about why your banker keeps selling you stuff and why you should listen. You can check out that blog post for more info while I do a quick overview of some of the supposedly destructive accounts I will supposedly try to force you into.

Overdraft protection – It’s not what it looks like!

Whenever I talk to someone about overdraft protection, they tell me that they know what it is and they absolutely don’t want it. I’ll ask them to explain to me what it is, and the answer will almost always be incorrect.

People seem to have this idea that overdraft protection is the ability to overdraft your account via ATM withdrawals and one-time debit card transactions, and so personal finance writers who don’t know what they’re talking about will tell you to opt out of overdraft protection.

But overdraft protection is not this. Overdraft protection is something else.

Overdraft protection is a source of funds – usually a line of credit or a savings account – that will automatically transfer into your checking account in order to prevent it (or “protect” it) from actually going negative. Instead of the $35 fee per item, your bank will likely charge you a much smaller transfer fee for all the items covered for that day (usually around $10), if they even charge you a fee at all.

There might be some fees attached to having the protection (such as annual fees) so make sure you find out about those. But that will definitely be better than paying huge overdraft fees all the time.

Guys, we as a country love to complain about how the banks steal from you. But those same banks are giving you a way to avoid fees. Listen to us for once.

The big house credit card

Do you own your own home? You do? Okay, do you have a Home Equity Line Of Credit? No!? I guess you just love living dangerously.

A Home Equity Line Of Credit, or HELOC, is at its simplest a big credit card that uses your house as collateral. You’ll have a higher limit and an APR closer to 3.50% than 35%.

This is huge.

If your home is damaged for whatever reason, you can’t rely on outside help. Even in a major disaster like Hurricane Sandy, homeowners saw little to no money from the government and their insurance companies for home repairs.

I know.

I was a bank teller at the time and got to see the embarrassingly small checks people were receiving.

So now you get to live out every rich Republican’s wet dream and pull yourself up by the bootstraps. Which means if you don’t have a HELOC to finance the repairs at a low rate, you’re relying on your savings, credit cards, and the kindness of strangers for support.

Have fun with that.

Higher level accounts and YOU!!!!

“What’s the minimum I need to open an account?”

This is the first thing that everybody asks when opening an account. Problematically, it tends to be the only thing that is asked when opening an account.

I know that, more than anything else, we just want a place to park our money, but asking what’s the lowest amount you have to keep regardless of how much money you have is essentially the same as ordering off the Dollar Menu at McDonald’s. Do I look like I’m about to conjure up some McNuggets for you!?

It might be annoying listening to us try to convince you to upgrade your existing accounts (for which we don’t even get sales points for), but there’s a reason that we do it. It might be annoying to listen to us try to sell you a higher level account at opening, but there’s a reason that we do it.

You see, accounts have different perks and benefits, but also different balance requirements. If you have money, you can get an account that gets you free checkbooks (which are very expensive when ordered at the bank. The bank is not the best place to order checks if you have to pay or them), free bank checks and money orders, non-bank ATM fee waivers, and the like. And without paying a monthly fee.

Most people think they are entitled to these perks due to having “a substantial amount” of money with us, having been a longtime customer, or being old. That last one I really don’t understand. Every banker has dealt with at least one elderly person who is convinced that they shouldn’t have to pay for checkbooks because they’re 85 years old.

But whatever the case, this is all false. The perks come with the high level accounts.

So if you’re giving us a $150,000 check to open your account and you are asking for the basic, low level accounts, it’s like going to a fancy steakhouse, asking for a Whopper Jr, but demanding to be charged for a filet mignon.

In other words, that’s stupid.

It’s good to know what the minimum balances are, but don’t ask me that question at account opening because that’s not the right question to ask. The minimum balance is zero; we have accounts that will just charge you $4-6 monthly regardless of your balance and give you absolutely no additional benefits.

Instead, tell me how much you’ll be keeping in your account on average (I know you can’t foresee exact balances, but you should know if you’re likely to be keeping a couple hundred dollars, a couple thousand dollars, or tens of thousands of dollars) and ask what account is appropriate for you. When I whip out an account, ask what the minimum is, what the benefits are, and what the account “below” that gives and requires.

Because everybody comes in, turns down the slew of free benefits I offer them because they are focused on minimum balance requirements only, and then I find them fighting with the teller later over a bank check. “Why do I need to pay for bank checks!? I’m a customer!”

Yes, unfortunately.

Mind you, not everybody is going to be able to afford the high level accounts and that’s okay. My thing is that you should be looking for the highest level of benefits for the money you will be keeping with us. That’s why we try to “upsell” you, or push you to higher level accounts.

And if that means that, in the end, you end up with the basic accounts, that’s fine. But let’s not laser guide your money there if we can get you some extra benefits without you having to pay anything for them.

Okay, so what’s in it for the banks, you ask distrustingly (is that a real word? I don’t think that’s a real word)?

Well, for one, we do get more sales points for higher level accounts. But banks also find that people with higher level accounts (and thus receiving more free perks and higher interest rates) tend to be happier with the bank and less likely to leave. And in the end, it’s our job to maximize your banking relationship with us, which is not the same as “pushing you out of useful accounts” as somebloggers contend.

Right, Jack?

You Don’t Have Our Interest

The final thing I’m going to talk about are interest rates. Which, if you haven’t noticed, are in the toilet right now.

Of course, people walk in and complain about it all the friggin’ time! “This bank is so cheap! It doesn’t want to pay any interest! This bank is always trying to find a way to make a buck!”

First, wow, I can see how a for-profit business not handing you free money is a crime against humanity. Especially when you don’t pay for just about any of the other services you receive. You know, in other industries, an hour of a professionals’ time can cost hundreds of dollars. Just think of that the next time you no-show for a sales appointment with me. Goddamn ungrateful little fu–

Anyhoo, the thing about interest rates is that they aren’t set by each bank in a vacuum. To grossly oversimplify things, they are based on the Federal Reserve Funds Rate. And if you check out this chart, you can see that the rate is at a historic low.

It’s currently at half a percent. In 1980, the rates were at 20%. And the current almost-a-decade’s-worth of near zero rates drove the average from 1971 down to 5.86%! Down to 5.86%! The whole economy flipped its lid when they raised the rates from 0.25% to 0.50% in December 2015! Could you imagine if we just went back to historically average rates!?

“Okay, but either way, the banks must be thrilled! Now they have an excuse not to pay us any interest! More money in their pockets!”

Calm down, Grandma. Put the damn passbook away and I’ll explain a few things.

Despite what you’ve been told by your buddy whose financial expertise sprang out of nowhere between liberal arts classes at community college and a career behind the counter at 7-11 – or by old/middle aged individuals who are supposedly banking experts because they’ve been bank customers for twenty years (great, you now have a Ph.D in Waiting On Line) – banks actually want to give you more money on your deposits.

That’s right! Banks want the higher interest rates! They wantto give you 5% or 10% on a CD!

Why, you ask? Is it because they want to give back to the communities they serve? Ha! No. Is it to attract new deposit customers? Nope, all a bank has to do is have a slightly higher rate than their competitors to attract retail deposit customers. They don’t need the return of a high rate environment to do that.

Rather, it’s all about profit margins!

I mentioned awhile ago that shrinking interest rates shrivel up banks’ profit margins like… well, I still can’t think of a non-dirty joke. That’s because banks, as you know, make money by loaning out deposited money at a higher interest rate than they are paying on the deposit itself. In other words, you put money in the bank and receive 0.50%, the bank loans that money out at 3.50%.

Sounds good, right?

The problem is that, just like your CD rates, loan and mortgage rates are also tied to the Fed Fund Rate. Which means that mortgage rates have also bottomed out. They were at 12.50% in 1985, which I believe is the amount that Ray Stanz mortgaged his house for in order to buy the New York City firehouse that would become the Ghostbusters’ headquarters. Now you can get a 30 year fixed for less than 3.50%.

Check for yourself if you don’t believe me.

So this ends up eroding banks’ profit margins. The spread between paying 4% on a CD and receiving 12% on a mortgage makes for much better cash flow than that of paying 0.50% on a CD and receiving 3.50% on a mortgage.

In April of 2016, the Federal Reserve published a study on the effects of “lower for longer” interest rates on bank profitability and banking systems. It’s not exactly light bedtime reading, but the short version is that bank profitability and NIM (Net Interest Margins) are adversely affected by long-term low central bank rates. And when you consider that countries like Japan have negative interest rates, well, don’t expect the banks to stop looking to make up the shortfall via fees.

Angry Final Thoughts From The Angry Retail Banker

There’s not much I can say past what I’ve already said. I actually have to write for my blog at some point. But so many people think that every little thing a bank does is “stealing”, a “scam”, or some sort of slap in the face. Eleven times out of ten, this attitude stems not from customer victimization but from ignorance.

You’re not going to agree with every little thing the bank does. I don’t, and I get paid to defend the bank’s policies from people too stupid to realize that you need to show ID to withdraw money.

But when you get right down to it, banks are for-profit businesses.

They are heavily regulated. They must protect their customers’ money, their own assets, and work to protect money laundering, criminal activity, and terrorism with every single transaction, which means even that teenaged teller who is working at Chase instead of flipping burgers at McDonald’s with his buddies has suddenly become conscripted into law enforcement.

They must manage billions of dollars worth of transactions between every possible person and merchant out there going through every conceivable channel. And their low paid staff must somehow be infallible walking encyclopedias knowing more about banking than your cardiologist knows about the human heart, all while making sales in the aforementioned heavily regulated environment that dictates what they are and aren’t allowed to say.

No, I’m not asking for your hearts to bleed for us delicate, unfortunate bankers. I’m saying that rather than trying to “push you out of useful accounts” and the like (or whatever other crime against humanity you want to slap onto your almost-mild inconvenience), consider that perhaps banks and their employees do certain things for a reason.

Not to screw you over.

Thank you for reading my rambling guest posts why banks charge the fees they charge, steer you towards the accounts they steer you towards, pay you the interest they pay you, and just generally act like banks, for better or worse. I now relinquish control of Enwealthen over to Jack… for now. Everybody, be sure to subscribe to my blog if you haven’t already done so and follow me on Twitter.

If you don’t, I’ll guest post on your blogs.

Image of bank vault door courtesy of Wikimedia Commons.


  1. As a former bank manager myself, I agree with a lot of what you’ve written. The bank is a for-profit business and consumers should expect it to act as such. While the banks are generally not out to “get you”, there are exceptions as we’ve seen with Wells Fargo recently and I’ve seen personally at the banks where I’ve worked in the past. Sometimes they are recommending accounts to benefit them and not the consumer. But it’s up to the consumer to listen to the pitch, ask the appropriate questions, and decide for themselves what’s best. There is no fiduciary responsibility on regular bank accounts and credit cards.

    • Here’s hoping Wells Fargo is an exception to the rule…

      While I don’t think banks are out to get me personally, I do feel they act in their own interests like most businesses. Perhaps I’m old fashioned but I still adhere to the idea of long term value in a world that more and more is focused on short term gain. Unfortunately, it can be difficult to quantify the monetary value of the goodwill created from a long term business relationship, so it’s often pushed aside.

      Perhaps I was just born in the wrong century.

    • Gary,

      Of course there are exceptions. I’ve seen it too, but like I’ve said, GOOD bankers will recommend products that help the customer. And GOOD banks have designed their products to compliment each other, naturally leading to solid cross-numbers and real customer benefit. And I think there are way more good bankers than society would have us believe.

      I do believe Wells Fargo is the exception to the rule. Their mistreatment of their employees (which is the direct cause of the phony accounts) has been well documented for years, and while I do believe they aren’t the only bank that treats their employees this way, they are the only one to have the cross-sell numbers that they had. It’s like an investment fund manager that’s earning investors a constant 25% return; you know something’s up. Hopefully Wells Fargo will get its act together.

      ARB–Angry Retail Banker
      ARB recently posted Wells Fargo Fires 5,300 For Opening Fake AccountsMy Profile

  2. This is an epic post that I am planning to bookmark and reread multiple times because there is so much information jam packed in here. Thank you for taking the time to write such a detailed explanation. I had no idea the inner workings of banks and this has definitely opened up my eyes. I clearly was naive not knowing that banks have a branch budget. Wow thanks again for sharing.
    Mustard Seed Money recently posted The Dream: House with a PoolMy Profile

    • Thanks, Mustard! It IS an epic post. They should make a big budget Hollywood blockbuster based on it.

      A lot of people don’t know exactly how banks work. Even this is just scratching the surface. But everyone has misconceptions about why the bank does XYZ, so this article is for that. Read this and you know more about banking than 99% of the population.

      ARB–Angry Retail Banker
      ARB recently posted Why Is Everything In Retail Banking A F***ing Problem!?My Profile

  3. Hi Jack,

    I have been asking the same question to myself when I first signed up with my National Bank when I took some time and thought about the services they are providing, the only thing that hits my head is that “How on earth they can run all of the functions without making any money?”, this the very thought which landed here.

    I must agree, everything has explained appropriately and in detail, and I’m convinced why I have to pay my bank for maintenance.

    Thank you for sharing such an interesting explanation, looking for more similar content

    • We’ve got a convert here!

      A lot of people don’t understand why banks charge fees or how they make money; they don’t understand how banks work. But of course, we do that with just about everything. I have no idea how the laptop I’m using to type this comment functions, yet here I am using it. As long as it works. That’s most people’s views towards their banks’ products and services. Understandable.

      But knowledge is power. And this sort of knowledge prepares you on how to deal with your bank and what to expect. And if nothing else, knowing more about the most important of financial institutions than 99% of your peers must feel good, right?

      Thanks for reading and commenting. Glad you enjoyed my article.

      ARB–Angry Retail Banker
      ARB recently posted Thoughts On The Wells Fargo Senate HearingsMy Profile

  4. Yes, banks are “regulated”, but as we’ve seen from the recent political exposures, bank regulation is a joke. They are able to rip people off and use the same money to bribe and influence Washington regulators. Very indepth and well-written article, but there is obvious bias towards the banking industry. Hey, I profit from the banking industry as well, so I won’t act innocent. But let’s not pretend that they aren’t actively looking to squeeze every penny possible out of consumers. Thus the need for “regulation”.
    Bill Clair recently posted Day Trading For a Living… Successfully? Yes, For An Elite Few.My Profile

    • You’re right in that banks are trying to squeeze every last penny from their customers. They are a for-profit business. Every business is looking to make as much as possible from each customer, just as every customer will try to get as much free/discounted products and services as possible. On the money making front, is that any different than what employees do? Trying to make as much money as possible at someone else’s expense? How many hours per year do we spend shopping online on our employers’ dime?

      Banks are very heavily regulated whether it seems that way or not. Are they too regulated, not regulated enough, or regulated just right? I don’t think it’s that simple; not all regulations are created equal. But either way, much of these regulations come down in the form of new restrictions on customers. Most of the bizarre rules against doing simple things that were commonplace years ago are due to regulations that don’t provide any revenue or anything other than costs to the bank (for example, Chase’s policy of not accepting cash deposits without ID). Just something to think of when pushing for more regulation rather than heftier punishments for those who commit crimes.

      ARB–Angry Retail Banker

Leave a Reply to ARB Cancel reply

Please enter your comment!
Please enter your name here

CommentLuv badge