The original paradigm for the banking system and free personal accounts came about because the banks were able to charge more interest on the money they lend. In our race to the cheapest opportunity, changes in the banking system and economic stress has now made it far more difficult for banks to compete efficiently and succeed at staying afloat after the disasters befell them.
The days of free toasters are bank accounts may be gone forever:
I grew up in the 70’s; does that make me sound old? Back then the banks were much more localized, and the system you see today was nonexistent. The use of paper account books and index cards maintained the financial system. Funds exchanged hands, and they were manually input. The cost of technology was paid by the hour and seldom did the funds leave the community into which they were deposited. To compete for business, the banks had to give away toasters, footstools, and clocks. It may not seem like much by today’s standards, but back then a toaster was a luxury product.
Today we are in a race for the cheapest and fasted. What Seth Godin appropriately calls a “race to the bottom.” It’s sad, but now even the bank system has now been caught up in the need to scrap for only a few pennies. Therefore, they now are creating a service based industry, instead of a by-product industry. This means that in the past they could make money from the difference from what they took on deposit and what they rented (loaned) the money for. Due to bankruptcy ’s, bad debt and unsecured loans the banks no longer have the same cushion they could afford when they only loaned to people who could almost absolutely meet the demands of the debt.
Be grateful for convenience:
When you want to cash a check, and you are concerned that the payer may not be able to make good to cover the amount the check is written for, a common practice is to go to the bank it is written on and exchange it for cash. You may also go to a check cashing establishment, but some of them hold you liable if the check bounces so read the fine print. When you take the
negotiable instrument to the bank who backs it, they may and often do charge a fee of $8-$10. Now the knee-jerk reaction is that it’s not fair that you are just trying to get your money and now not only do you need to go out of your way to that bank but now you have to pay for it to be cashed too? So why should you be grateful?
The fact is, there are a few options. The first being you can go to virtual banking. This can be amazing, except you may be charged three to five dollars plus a % every time you need cash. Some local businesses may not take checks written on by these banks. However, most businesses that accept checks will clear them electronically. Much of business can be done by debit/credit card anyway so the check situation may be moot.
The next option is, of course, a local brick and mortar bank. Now they may yield a location near you and even give free check. These sounds like it could be the optimal option until you leave town. Where do you find a Florida based bank in Arkansas? So the last option is to choose a bank that is available country or even worldwide. But, they require you to pay a monthly fee, or at least perform a few extra activities such as direct deposit and using your debit card. They do this so they can collect additional fees from other businesses.
Service Base Business of Banking:
Originally banking made money as a byproduct of the money is kept safe. In actuality, it was borrowing money from the community, and lending it to others in the community for interest and taking the interest to create money to pay the employees, and overhead to run the business. Due to the competitive nature of online banking, high-risk lending and investments, and bankruptcy the banks can no longer make the money they once did.
So then why should one be grateful for paying a fee of $10 when we live in a world where entitlement leads us to believe that we deserve to have free banking? Well, how about security and convenience. Do you likewise complain that you own your own house or pay rent? Should you just get it for free or do you want it cheaper?
Think a moment would you feel any different if the fees were $2 or $1? Many people in my belief are hung up on the principle that they shouldn’t have to pay. But, please be mindful the person behind the counter must be paid too, the electric company, the rent for the land, the expense of the business equipment must be paid.
The harsh reality is that the banks must make enough money to pay their bills and their employees. So when you are cashing a check and paying a fee, you are contributing to the cost of overhead. However, you are also receiving the convenience of getting your money right there, and there is a correlation between the fees and the number of branches and additional services the bank offers. Free banks usually offer great customer service, charming staff, and local services that are untouchable. But, try to find a branch when you 800 miles from home? If your identity is stolen while you’re at an airport at 3 am can you call their 24 hour customer support to get new tickets and money for a meal? Unfortunately, the old adage holds true in the case “You often get what you pay for.”
– J –