Proposed law would make it easier to switch banks, but at what cost?

I occasionally cover topics related to the financial services industry because my primary employment serves financial institution clients. There is a proposed bill in Congress right now that caught my attention for several reasons: consumer advocacy, government regulation of the banking industry, and implications in the marketing technology space.

A brief recap.
The Freedom and Mobility in Consumer Banking Act, H.R. 3077, was introduced by Rep. Bradley Miller [D-NC13] on October 3, 2011.  The purpose of the act is to make it easier for consumers to close an account with one financial institution and move to another financial institution.  The legislation is supposed to increase competition between banks and provide consumers lower overall banking costs. Many consumer advocate groups support the proposed law.

As of the writing of this blog post the latest action on the bill was on October 21, 2011.  The bill  was referred to the Subcommittee on Financial Institutions and Consumer Credit.

The proposal in brief.
“To amend the Federal Deposit Insurance Act to ensure that customers have the right to immediately close any account at any insured depository institutions on demand, without cost to the consumer, that consumers receive any balance in their account immediately, and for other purposes.”

The Bottom line.

If enacted, the bill would:

  • Require financial institutions to close an account, when requested by the account holder,  at no charge at any time, regardless of account balance.
  • Prohibit financial institutions from charging additional fees for the closure.
  • Allow consumers at least 30 days to send payment for an account that is closed with a negative balance.
  • Prohibit financial institutions from reporting delinquent accounts that have a negative balance solely because of financial institution assessed fees.

So What does this all really mean?
We’ve learned recently that government trying to regulate bank fees with the consumer in mind only ends up hurting the consumer in other areas. Look at the effects of the Durbin amendment in the Dodd-Frank Act. Banks have dropped debit rewards programs, many experimented with fees on debit cards, and others are eliminating services that were previously free or increasing existing fees. Banks are a business and they exist to make money for their employees and shareholders. Trying to control the pricing of a business only forces them adjust pricing in other areas.  That’s just part of managing a business wisely.

I’m not saying that banks should justify all their fees because they need to make money. In fact I argue against that point in a post entitled a case for customer focus in the midst of financial regulation. What I am saying is that businesses should be able to price their services based on competition and market prices. Consumers have a choice and can vote with their wallet.

Back to our discussion on closing a bank account. Most financial institutions don’t charge a fee to close an account today. While this proposed legislation would aim to make sure that account closure fees are illegal, and thus not implemented in an attempt to keep customers from leaving,  I don’t think it’s necessary.  Two reasons for my opinion:

1. The court of public opinion convinced the larger financial institutions in the country to retract the debit card usage fees they had planned in response to the Durbin amendment. The internet and social media have changed how quickly consumers can become organized and allows them operate in large groups with a strong voice. Excessive account closure fees would go-over well with the public.

2. Switching banks is a hassle and isn’t something that can happen with a single phone call or mouse-click. To switch an account, the consumer would need to go through a checklist like this:

  • open a new account
  • move any direct deposits
  • change any automatic debits
  • order new checks
  • order a new debit card
  • request account closure from the existing bank

My point is, I don’t believe account closure fees are inhibiting customers from switching today and I don’t think banks would make this a sore spot for their public relations based on public opinion. The bill is trying to solve a problem that doesn’t exist. The shares research that shows the reason most people switch banks is due to a change life circumstances, not poor banking service. That’s another reason that account closure fees would be unpopular.

The consumer needs to have some skin in the game also.
While the bill is aimed to help consumers, it should not relieve them of their responsibility for sound financial management. It also should not place a burden on financial institutions to recover money without being able to charge for such services. A section of the bill reads:

(3) NOTICE AND OPPORTUNITY FOR REPAYMENT OF OVERDRAFT- If an account of an accountholder at an insured depository institution has a negative balance at the time the account is closed, the insured depository institution– `(A) shall promptly notify the account holder of the fact of the negative balance and the amount due; and `(B) may, after the end of the 30-day period beginning on the date notice is provided to an account holder under subparagraph (A)– `(i) report the fact of the outstanding balance or any other adverse information with respect to such account to any consumer reporting agency, subject to the limitations in paragraph (2); and `(ii) take any other collection activity with respect to such outstanding balance.

Let’s be real. if a consumer requests to close an account with a negative balance then the financial institution should have a right to request the amount of the overage immediately before dismissing the account. Otherwise we are saying banks should be required to give free loans to consumers who don’t exercise financial discipline.

While there is stipulation about reporting the incident to a credit agency why should the financial institution have to wait 30 days in this situation? In that time, the customer may have opened an account with another financial institution.  This type of unfair consumer protection reduces the value of the risk score based systems which allow financial institutions to make informed decisions during account opening. They might find themselves floating another negative balance if the consumer decides to spend more than they have and switch accounts again.

A bank has the right to charge for services performed after an account is closed.
The bill also has language that concerns moving a direct deposit to the new financial institution.

Transfer of Direct Deposit Received After Notice of Closure and Payment- If– `(1) during the 30-day period beginning after any balance in an account at an insured depository institution that is closed by the institution pursuant to a request by the account holder has been repaid to the account holder, a previously scheduled amount intended for direct deposit into such account is received by such institution, and `(2) before the time such amount is received, the consumer provides the insured depository institution with an account number and insured depository institution routing number for a successor transaction or savings account at another insured depository institution, the insured depository institution which receives such amount shall transfer such amount, without a fee and by electronic fund transfer, to the insured depository institution identified by the former account holder for deposit in the transaction or savings account identified by such former account holder.

Again, let’s be reasonable. It should be the responsibility of the account holder to move all direct deposits and auto-debits to a new account before closing their existing account. If the financial institution with the closed account has to negotiate and transfer a deposit to another financial institution on a closed account then they should have the right to charge for that service.

Marketing Technology Implication Number One
If enacted, customers can close their account in-person or remotely through some electronic channel. So at a minimum, financial institutions would need to support account closure in their digital channels.  But this would really be a call for financial institutions to create customer focused conversations in those channels to gain feedback from the customer about why they are leaving and possibly making an attempt to retain their business.

Case in point. I recently closed an account with Wells Fargo when they announced they would implement a monthly fee to use the debit card. This is an account that I had held for 20 years. It was originally opened with First Union bank which was purchased by Wachovia bank. Wachovia was purchased in recent years by Wells Fargo. I closed the account through online banking by sending a secure message requesting account closure. I never spoke to a live person. No one from the bank ever contacted me about why I was leaving and no one attempted to retain my business. Within 24 hours of sending the request my account was closed.  A 20 year relationship ended just like that.

There is an opportunity here for banks and credit unions to interact with customers if they use a remote channel for account closure. I fully believe account holders should be able to close accounts through secure digital channels. But financial institutions owe it to themselves to get feedback during the process.

Marketing Technology Implication Number Two
Switching banks is a hassle because of all the work involved. A bank account isn’t like a monthly utility bill that we see once a month. It has hooks into it like direct deposit and bill payment.  This is part of the reason that bank switching services are getting more attention by some financial institutions.

The bank switching process is full of opportunities for financial institutions to learn and profile new account holders. There is exposure to elements of the customer’s life such as loan payments that might help the new financial institution with ways to serve the account holder in the future. The switching process does involve the consent of the customer to manage and move banking setup. It’s a great area for innovation and creation of new processes and procedures to bring customer service into focus.

So what’s your view of this proposed legislation?