Four Ways to Beat the Big Banks

Mad at the big banks? Who isn’t?

They largely caused the financial crisis, which sparked the Great Recession and massive government rescue efforts that have nearly bankrupted our Treasury and that of many other countries. Our children and grandchildren will pay the price for decades.

And what did the banks get in return? Blow-out profits in 2009 (underwritten by zero-percent interest rates and massive government guarantees) and of course those big bonuses to undeserving employees.

New York State Comptroller Thomas DiNapoli just reported Wall Street bonuses rose 17% last year, to $20.3 billion, the second biggest payout ever. That, of course, is right in line with the increases most of us got, right?

Why do I hear silence?

The government has taken some steps to rein in the banks, particularly President Obama’s proposed $100-billion fee to recoup at least some of the costs of the bailout, and the so-called “Volcker rule”—really a Glass-Steagall lite that would limit the risky activities depositary institutions can take.

More comprehensive financial reform legislation is working its way through Congress, but I’d be very surprised if it had many teeth left by the time it lands on the president’s desk.

But consumers and investors don’t need to wait for the government to “protect” them. There are some things all of us can do to keep our hard-earned money out of the big banks’ pockets—and keep the heat on their pay practices.

They’re all legal, completely ethical in my view, and mostly good, common-sense money-management techniques that will improve your household balance sheet while giving you the extra satisfaction of “sticking it” to the banks.

In other words, don’t get mad; get even.

These days, fees are the mother’s milk of banking. Net interest margins—the spread between the interest banks pay out and what they take in, divided by revenues—slipped to only 1.14% last year, according to Mike Moebs, president of Moebs Services, a Lake Bluff, Ill.-based economic research firm. Until 2007, net interest margins were a fat 2.75% to 3%.

Fees picked up some of the slack. So-called “non-interest” income hit 2% of revenues last year—more than double the 0.8% of revenues it represented a decade ago.

Banks took in nearly $39 billion in overdraft fees alone in 2009 and $22 billion in credit card fees—more than $60 billion altogether. The new credit card act, which went into effect this week, will cause a $7-billion drop in banks’ income from cards, and other new regulations will shave up to $8 billion from overdraft fees, cutting banks’ income from those two activities by 25%, says Moebs.

No wonder the banks’ lobbyists are swarming Capitol Hill like locusts!

“Banks are collecting tens of billions of dollars in fees from consumers, and every consumer should make it his goal that none of those billions should come out of his pocket,” says Stephen Brobeck, executive director of the Consumer Federation of America.

So, here are four ways you can beat the big banks:

1. Don’t bounce checks, and don’t exceed spending limits on debit cards. Overdraft fees on debit cards, checking accounts, and other products are incredibly lucrative for banks and very costly for consumers. Financial institutions charge a median $26 for overdrafts—Wall Street banks charge $35 a pop—and you can be hit with one just as easily for buying a Grande Latte at Starbucks as for splurging on a flat-screen TV.

And a mind-boggling 90% of those overdraft fees are incurred by just 10% of American checking accounts, says Moebs. Granted, some people are so deep in debt it’s just hard to get out, but knowing your balance is the best way to avoid these fees.

Page 2: More Ways to Beat the Banks

Brobeck suggests getting debit cards that will reject a purchase if you don’t have enough  funds in your account. Moebs recommends asking banks to notify you by email or text or voice message when balances drop below certain levels.

2. Pay off your credit card balance every month—on time. By doing this, you’ll deprive banks of late fees and finance charges. And you’ll forestall a lot of nasty unintended consequences.

“If you don’t [pay on time],” says Brobeck, “you’ll not only get hit by a very high late fee, you may see your interest rate [go up] to as much as 30%, you may see the [rates] on other cards [increase], and your credit score could [suffer].”

Brobeck also urges you to hold as few credit cards as possible—and keep your balance below 50% of your total credit line.

And oh, yes, load up on cash at your own bank’s ATM, so you don’t have to pay a fee for the “privilege” of hitting another bank’s cash machine.

3. If all else fails, take a hike. There have been some calls to boycott the big banks—from liberal blogger Arianna Huffington and others. And both Moebs and Brobeck suggest that where possible, people should shift some accounts to community banks and credit unions. But it’s not always easy.

“It’s incredibly difficult to avoid the big banks because of consolidation,” says Brobeck, who points out that four major institutions have 20,000 of 90,000 bank branches and 60% of the credit cards issued.

But a lot of these big banks—Morgan Stanley, BofA/Merrill Lynch, etc—have big asset management arms that manage money mostly for institutions and affluent individuals. They are characterized by mediocre performance—at best—and high fees.

So, why not pull your accounts from these fee gobblers and move them to independent financial advisors—or even manage the money yourself? That seems to be happening at Swiss banking giant UBS (NYSE: UBS), which has been hemorrhaging assets and clients in the wake of its disastrous performance during the financial crisis and a major scandal resulting from its alleged efforts to help more than 50,000 Americans hide assets from the IRS.

4. Raise your voice and protest outrageous bonuses. If you own any large-cap or index mutual fund in your 401(k) or other account, you’re probably a shareholder of one or more of the big Wall Street banks. So, you have every right to call your fund company and tell them you want them to at least push for more shareholder say in setting executive pay.

“I think shareholders are not as focused on this issue as they should be or will be,” says Nell Minow, editor and founder of The Corporate Library, which does research on corporate governance.

“This needs to be solved by the shareholders,” she says. “The public better pick up the phone and call up the people who manage their 401(k)s [and tell them] that they have to do better.”

And indeed, there does seem to be some progress here. Morgan Stanley (NYSE: MS) reportedly took a lot of heat from big shareholders about its bloated bonus packages despite relatively poor performance.

So, you see, we can make a difference. And in dealing with the big banks, we always have to keep one thing in mind: The money’s better in our wallets than in theirs.

As they say, living well is the best revenge.

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own.