Is Bigger Really Better?

By Stacy Perman

Bank on this: if recent mergers serve as a guide to the future, the brave new world of financial services means higher costs for consumers, at least initially. The banking industry has rolled up six straight years of record profits, fed by massive consolidations and the application of new technologies. The industry's net income hit $59.2 billion last year, up 13% from 1996, with fewer but larger institutions. According to the FDIC, last year 599 bank mergers took place, reducing the number of banks to 9,143 from nearly 14,000 just 10 years earlier.

The process of consolidation, as the banks love to point out, creates cost saving. But several studies show that, if anything, the banks have pocketed whatever value they've sprung loose. And new and higher fees have been introduced as banks merge and branches close. Noninterest service fees--for bounced checks, certified checks, etc.--now account for a third of industry profits, totaling $18.5 billion. Last year a report by the U.S. Public Interest Group (USPIRG) found that consumers paid 15% more to maintain a regular checking account at a big bank than at a small bank. Similar results were found by a Federal Reserve report to Congress last June. "Merger mania is making the fee-gouging big banks even bigger," complains Ed Mierzwinski, consumer program director for USPIRG. "Fewer and bigger banks mean consumers face fewer choices, less competition and even higher fees."

The banks tend to view technology as a profit center. San Francisco-based Wells Fargo offers a checking account that, after an allotted three free calls, charges customers 50[cents] to use its automated-voice-response telephone lines or $1.50 to speak to an agent to shift funds or ask questions. In a study of 470 banks released this month, USPIRG reported a rapid increase in the number of banks that impose a surcharge on noncustomers using their ATMs. Furthermore, bigger banks surcharge more often, and these fees average $1.35 more than small-bank surcharges.

Consider First Chicago, which encourages those with Self-Service checking accounts to use ATMs by charging $3 for a visit to a live teller for some transactions. First Chicago announced a merger last week with Banc One Corp. Banc One, based in Columbus, Ohio, does business in 12 states and charges account holders if they use one of its own Rapid Cash Machines. "[The banks] say these mergers create efficiencies," says Mary Griffin of Consumers Union. "But with the efficiencies there is a dis-economy of scale, which costs consumers more." In other words, it costs to save. That's one reason why many consumers now "bank" at the growing number of check-cashing services, where they can pay bills, and at pawnshops. "Over 12 million families already can't afford to bank," says Mierzwinski. "Mergers just exacerbate that problem."

Not everyone disparages mergers. Community banks have become a sanctuary for small businesses and customers who can't afford the big banks. David Williams, chairman of Hale County State Bank in Plainview, Texas, has seen his deposits increase and his loan applications rise 30% in the past 18 months as two area banks were gobbled up. Lesson: you can move your account. But beware, your bank will probably charge you for that too.

--By Stacy Perman