I wrote about people’s irrational sensitivity to gas prices some time ago. This time I’m writing about people’s irrational sensitivity to service price increases. In each case, we are not talking about a lot of money. There are values behind each service. Still, people complain vehemently about the price increases.
Debit Card Fees
News came that Bank of America is going to charge $5 per month for using the debit card for retail purchases. Earlier some other banks rolled out similar service fees in select geographical areas. The reaction from the general public is a huge outcry. President Obama denounced it in an interview on ABC.
Is it such a big deal when the fee is completely avoidable? The fee is charged if you use the debit card for purchases. If you don’t use it for purchases, then there is no fee. Problem solved.
If you do want to use the debit card for purchases, it means that you derive a value from using the debit card over using something else (credit card, check, or cash). In that case, how is it unfair for a bank to charge a fee for delivering value?
If you think the fee is too high relative to the value received — that it should be $0.25 a month, not $5 a month — isn’t it like everything else we buy every day, that you either don’t buy or you seek out a more cost-effective alternative?
The bank isn’t forcing anybody to use the debit card for purchases. It only puts a price tag on the service it offers. It is a service after all. The customers are still in complete control in accepting or rejecting the price tag based on the perceived value of the service. If it’s too expensive, just don’t buy or buy something else. End of story.
People still want the service. They just want it for free. There are plenty of alternatives. I really don’t see what the problem is. Let the price drive supply and demand to a new equilibrium.
Similar reactions happened when some banks raised ATM fees from $3 to $4 or $5.
The fee is only charged to non-customers. Think about it. You are not their customer. The bank isn’t obligated to let you use its service for free. It puts a price tag on the service. You see the price tag. If you don’t think it’s worth it, press Cancel and walk away. You won’t be charged. Find your own bank’s ATM or use a bank that reimburses you for ATM surcharges. Problem solved.
Airline baggage fees are another popular topic for complaints.
It costs money to transport those bags on a plane. If you don’t believe it, try shipping your bags by FedEx and UPS and see what happens. If it costs money to provide the service, why shouldn’t airlines be able to charge for it?
It should be included in the ticket price? Then you are paying it whether you check bags or not. When I go to a restaurant, I pay for wine only if I drink wine. I don’t want wine included in the price of my meal. How are baggage fees different?
It used to be included? How does it make it right only because it used to be that way? It only means some people overpaid for years.
Netflix raised its price on customers who receive both streaming and DVD-by-mail. Again there were a lot of complaints. Providers set prices. Customers accept or reject prices. Complaints only mean that customers want the service but they just don’t want to pay the price the provider asks for.
When I go to a store, I see shampoos selling from $1 a bottle to $20 a bottle. I pick the one that I perceive as the best value, neither the least expensive one nor the most expensive one. I don’t complain bloody murder how dare they want $20 a bottle for the more expensive shampoos. What if the brand I usually buy all of a sudden raises the price to $20 a bottle? I just switch to a different one. Supply, demand, substitutes — basic stuff in Econ 101.
What’s the difference here with Netflix? You reassess your purchase decision. Either canceling one service or another or accepting the new price would be a rational response. But complaining? I don’t understand. It only tells me that people still want both streaming and DVD-by-mail. They just don’t want to pay the new price. Is the extra $6 a month such a big deal? The new price is still a lot cheaper than cable.
It seems to me that only service price increases draw these irrational responses. We have no problem with switching physical products, but we don’t like switching services. Providers know very well after all the complaints, many people still don’t switch even if they say they would switch, because the services they offer are still the best deal when everything is taken into account.
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Excellent post, TFB! I, too, am wondering what the big deal is for both the debit card fee and the Netflix split. I don’t use debit cards, except for ATM access, and I never use banks that charge me a fee just to be a customer. As for Netflix, adding DVDs isn’t worth the $6 increase to me, as we usually only go through one or two a month (Redbox is ubiquitous and cheaper). The streaming stays because it’s worth $8/month to my family. Simple as that.
Money Beagle says
Ally Bank has a TV commercial where some guy is standing at an ATM and can select ‘Accept’ or ‘Not Accept’. He ends up selecting ‘Accept’ which I think is really weird because I would think it would have had more impact had he hit ‘Not Accept’ which would have smoothly led into the fact that Ally doesn’t charge these fees.
In any case, you’re right, by simply changing your habits you can avoid the fees, though the banks are showing that they want to get their profits one way or another, so if everybody started changing their spending habits, they’ll find another fee to institute. It’s just staying one step ahead of the game!
Matthew Amster-Burton says
TFB, I think the outcry over bank fees is partly due to the friction/transaction costs associated with switching banks. Personally, I’d like a level of predictably in the cost structure of banking services that banks can’t actually offer.
I’d be curious to see an inclusive breakdown of charges for financial services paid by the average person (or several “average people”):
* Interest on debt
* Mutual fund fees and expenses
* Bank fees
* other stuff I’m not thinking of
In the scheme of things, you’re right: bank fees are probably by far the smallest category for most people. But they sting like paper cuts.
@Matthew, “I’d like a level of predictably in the cost structure of banking services that banks can’t actually offer.”
How is it unpredictable if they tell you about it up front? I know exactly what my bank charges (or does not charge).
TFB, good post, but I think you’re missing one perspective: Doesn’t it make more sense to keep current customers happy so they remain customers, rather than alienate them? How much does Chase or BoA spend for each new customer with their $100 bonus for opening an account,plus advertising, etc? Yet they have no problem losing existing customers who switch to a fee-free bank like Ally. Do they really come out ahead in the long run?
Harry Sit says
@Mark – I’m pretty sure they did their calculations very carefully. In a giant corporation like B of A or Chase, programs like these take months and literally hundreds of people to plan and execute. Any angle you and I can think of, plus many more we don’t have any clue of, have been explored and evaluated. They understand where their strengths are versus competition. You would think it’s too obvious everybody should use Ally, USAA, a credit union, etc. but that’s not the case, despite all the marketing Ally does. See my previous post
If Credit Unions Are Better, Why Don’t More People Use Them?
I’m sure they are prepared to lose some customers. Maybe their studies show those customers who are more prone to switching aren’t profitable anyway. Meanwhile their marketing and signup bonus will draw in more profitable customers.
So, TFB, you never complain about anything as a consumer? Your attitude is always “I’ll just take my services elsewhere”? What if you get an overcooked steak at a restaurant? Do you complain about it or just decide that you’ll never go back there again?
Many things are not as easy as just choosing one brand of shampoo over another. You don’t have a business relationship with a shampoo brand. You do with a bank, cable company, netflix, etc.
I am not sure of the authors point. Why shouldn’t somebody express dissatisfaction when they are dissatisfied? Isn’t that the whole point of websites like Yelp and Trip Advisor?
That would be somebody saying “I wish the Tea Party/ Occupy Wall Street/ any-protect-group-you-can-think-of would shut up. If they don’t like the current policies, they should simply vote for somebody else”.
Harry Sit says
@Bucky – I do complain if I don’t get what we agreed. Overcooked steak, yes. A fee increase announced months ahead of time, no. Businesses want you to think it’s a relationship so you don’t switch. I see it as repeated purchases. They don’t promise to me they will never raise prices or change their products. I don’t promise to them I will always buy from them. If they change what they sell, I change what I buy. If competition offers something better, I move over to the competition even if they didn’t make any changes.
Awesome post! I was asked to sign a petition in protest of the BoA fee. I didn’t. It’s not because I want it or like BoA (I don’t and I don’t). It just seemed silly and irrational to protest. You articulated it perfectly. The best way to protest it is to not use it.
White Coat Investor says
Good post. So true. Behavioral finance is alive and well.
It is human nature to make a comment when you start getting charged for something you previously got for free. I like most of your articles but one complaining about people complaining?
Those fees are almost directly imposed by Senator Durbin’s bill to “punish the eeeevil banks”. He and the President are only shocked that the banks aren’t simply sitting and taking it, but doing the responsible thing and shifting the cost.
Think of it this way. Creating a fee where there previously was none is guaranteed to anger and drive away customers. What business in their right mind does that? Clearly then, the banks have encountered rising costs in some form. What are those costs? If the President is truly surprised, then he’s amazingly ignorant of grade school economics. I personally give him credit for more intelligence than that, which leaves hypocrisy in the form of blaming the eeeevil banks instead of admitting his own party is responsible.
$60 is menaningless to those with choice, education, and income to spare
on the other hand, given the amount of public money that has gone in to BofA, both stealth ond not so stealth, do you really really think that the reaction from those who have few other options (not everyone has access to many banks) and low incomes is going to be positive? many do not have access to credit cards – shocking I know!
love your site. think, just this once, about those who are in bad financial shape. naked pursuit of profit by a taxpayer financed entity is going to get backlash.
I’d love to let suply and demand determine the process, of course, I woudl have loved to set supply and demand determine the process when BofA and Citi were insolvent, but we didn’t do that either did we?
and yes, I would leave them if I was one of those who banked with BofA.
Harry Sit says
@enonymous – You don’t need a credit card to avoid this fee. We have 8,000 banks plus another 6,000 credit unions in this country. You have plenty of other choices wherever you are, regardless whether you have high or low income. Show me a place where your only choice is Bank of America. If you do find such a place, is it B of A’s fault that no other banks or friendly credit unions bother to serve that community?
People have very distinct attitudes when buying a product versus buying a service. A service comes with implicit costs, likely loyalty and most importantly trust – all of which are responsible for changing the transaction into a relationship. A free checking account came with a peace of mind and obvious transparency (except for people who willy-nilly overdrew). I think BofA customers feel that these were violated & that their loyalty meant nothing to BofA who is after satisfying its shareholders and doling out undeserved largesse to its top executives. The anger is more about the crack in the relationship than it is over the money. Most customers feel that they cannot trust BofA to be fair to them or expect them to be consistent. This reaction will manifest itself more strongly in a few quarters when the bank runs into some other trouble. The presence of other banks and their products is largely irrelevant. Those were present even before BofA introduced the fee.
Actually you could argue rather strongly that tbtf/sifi banks are the reason that they have fewer competitors. After all, the FDIC can shut down local and regional banks when they fail. The big boys? Not so much.
Look, my point wasn’t that there aren’t other banks. My point was simply that for many lower income individuals, switching banks isn’t something they do
easily, or sometimes even know how to do. Many lack online access.
Likewise the patsy that is the American taxpayer is stuck paying bofa to keep them profitable.
The ire that has been raised speaks to the growing realization that either we treat banks like public utilities, or they will use their importance to generate profits with explicit backing by the taxpayer for their losses. Raise fees? Sure. Take losses on bad loans? Never. Change FASB 157 instead…
If bofa played by the same rules as a local bank, it would have enjoyed a bank failure Friday by now. Instead they get to raise debit card fees for poorer customers to make sure they stay profitable. Nevermind their insolvency. Small detail to be ignored in this otherwise perfect story of the free market at work.
Harry Sit says
@Enonymous – I have no problem letting the banks fail when they ran into trouble a few years ago. Bailing them out wasn’t my idea. First you said there are those who have few other options and low income. Now you are saying options aren’t a problem but they just don’t know how to use those options. They opened up their current bank account just fine. B of A isn’t known as the most helpful in opening bank accounts for customers, is it? Nor is it known as the preferred choice of low income customers. I don’t know where you get the idea that low income customers must be stuck with B of A. I’m sure the customers can open up another account just fine if they want to. Give them some credit. If they need help, the other banks’ employees will gladly provide help.
Netflix made a mistake, though. Movie digital downloads on amazon are only 4 dollars. For busy people (like me) who only watch 1-2 movies per month, amazon makes more sense.
Netflix is really only worth it if you watch TV shows that you can’t access on TV for some reason (old shows, HBO stuff, etc.).
I’m pretty sure they did their calculations very carefully. In a giant corporation like B of A or Chase, programs like these take months and literally hundreds of people to plan and execute. Any angle you and I can think of, plus many more we don’t have any clue of, have been explored and evaluated. They understand where their strengths are versus competition.
Umm, you’ve heard of the 2008 financial crisis, right? You’ve heard of Lehman and Bear and Merrill and AIG? You’ve heard of the other surviving finacial institutions, including BOA and Chase, who only survived because they were bailed out by the federal government and without the backstop would have run out of money within days?
I think any assumption that large financial institutions do their calculations very carefully, think of all the angles, account for risk, plan long-term, and understand their strengths and weaknesses is no longer valid.
Harry Sit says
@Stefan – The financial crisis showed that they calculated wrong, not that they didn’t calculate. I wrote from the experience of working at a company much smaller than big banks like B of A or Citi. Much smaller moves than their headline generating fee increase announcements would involve multiple rounds of discussions and signoffs from multiple departments. They just don’t do these things willy-nilly. They could still underestimate the impact, but they surely made an estimate.
There’s not much difference between “calculating wrong” and not doing your calculations, because in both instances, you get the wrong answer.
I’m in the financial industry as well, so I understand how these decisions get made, and how often even truly bone-headed mistakes can get through the system because everyone assumes that it can’t possibly be a stupid thing to do because if it was, would the person up the chain have signed off? It’s ipso facto reasoning.
The very fact that these decisions “would involve multiple rounds of discussions and signoffs from multiple departments” often helps to ensure that stupid ideas get through, because each department signs-off partly on the assumption that the others wouldn’t have signed off if something was wrong. This is how the mortgage crisis happened.
Really, the time is long past to assume any base level of competence. Seemingly quite intelligent people often do very stupid things. Ask New Coke.