There are always unintended consequences to government interference in the marketplace, and that’s no exception with the banking industry, as recent fees were added to checking accounts at Bank of America (NYSE:BAC) and Citibank (NYSE:C) in order to make up for lost income from recent government regulation added to the industry.
Unfortunately, consumers, for the most part, don’t understand that if income is forcibly taken away through government interference, then it will have to be made up somewhere else, or there wouldn’t be a banking industry.
So when people were socked with overdraft fees, for example, or high interest rates on their credit cards, they rebelled via the government, pressuring lawmakers to interfere so they wouldn’t have to pay these additional fees.
I don’t mean by this that the banks shouldn’t have communicated better concerning the overdraft fees or credit cards, but it was still the responsibility of people with accounts to manage their financial affairs, and not spend money they didn’t have in their accounts.
The point is, banks are in business to be profitable while offering a variety of services. If revenue is blocked up in one area, they’ll simply transfer it to another, where consumers will have to pay for it. Nothing is for free, and if consumers want to use a bank, it’s not going to be for free … someone has to pay for it.
Essentially what happens with government interference in the markets is they stop up one revenue hole, which then causes a bank or financial institution to find and open up another. In the case of checking accounts, that’s what’s now happening. One way or another, banks have to make a profit in order to continue operating. They’re not non-profit organizations.
While taxpayers in America were rightly angered by the bailouts of the banks, those that were poorly run indeed should have been allowed to fail so those that kept operational costs under control could have survived and grown, creating a healthier financial base for the country. Since that wasn’t allowed, the focus was turned to any type of unpopular bank practice like overdraft fees in order to vent some of consumers’ anger toward them.
The bottom line is if government interference cuts off a revenue stream, the consumer eventually will pay for it by adding fees to former free or low-fee services. That will probably increase at other banks who have to make up for the revenue lost from unpopular revenue streams, specifically those being regulated by the government.
I labeled this as folly because it’s inevitable that it happens, and a healthy banking system must of course generate revenue. No matter how many holes the government attempts to plug up, the consumer will end up paying for it in the long run, making the cost of doing business with banks – for them – even higher.
Unfortunately for consumers, they’re not going to understand that their anger and rants simply transferred what they paid from banking from one type of fee for another. Unintended consequences.
