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Last November, Gallup found that only 15% of Americans had "a great deal" or "quite a lot" of confidence in the U.S. banking system. That's a new low. This is a problem not only for the financial industry generally but for individual banks too. That's because people who lack confidence in their bank may be less loyal -- and they may be more likely to leave it and go elsewhere. 

Bankers may think they aren't doing anything wrong; they're just trying to provide a return for shareholders. So from their perspective, they're doing the right things. In that case, why are customers reacting so strongly? Because bankers are also doing things like overtly passing on costs in the form of fees, which infuriates the customers who are expected to pay them. And bankers are also making cuts in customer service, which not only angers customers, but it basically encourages them to walk out the door.

It doesn't have to be this way. As Gallup Chief Economist Dennis Jacobe, Ph.D., discusses in the following conversation, there are ways to do the right thing, both by the bank's P&L sheet and by its customers. But banks need a more educated view of customers and their own place in the consumer economy. In short, Jacobe says, they need to "think behavioral economics."

GMJ: What do you mean when you say banks should think behavioral economics?

Dennis Jacobe, Ph.D.: Behavioral economics is the study of the ways that emotion affects how people make decisions and, ultimately, how they behave. I think the debit card fee debacle provides a good example of how emotions play a role in consumer decisions.

The Dodd-Frank Act required changes in how much banks charged for processing debit card use. When the Fed issued the standards required by the act, bank management tended to feel that the imposition of limits on the fees they could charge retailers for debit transactions were totally unfair. As a result, many banks seemed to think it was OK for them to replace this source of income by adding debit fees to their customers' accounts. If they were questioned by their customers, they could explain that this was the result of a change in government policy. Thus, the debit fee pricing decision was a financial calculation aimed at replacing what had previously been a revenue source.

Unfortunately, this finance-focused approach to replacing the bank's lost revenue ignored some of the basic tenets of behavioral economics. From a behavioral economics perspective, one of the worst things a company can do is to begin charging a new fee for a service that had previously been free.

GMJ: And we all remember what happened.

Dr. Jacobe: Yes. Predictably, there was a huge backlash. And the situation was worsened by the way the proposed consumer debit fees became entangled with the anti-bank story line. Not only were these fees perceived as unfair, but they were also perceived as a way for greedy bankers -- who had been bailed out by U.S. taxpayers -- to gouge their customers. Further, the price-leader way of introducing these fees doomed them to failure.

GMJ: Price leader?

Dr. Jacobe: This is a tactic we often see in the airline industry: One airline announces a fee increase hoping the others will follow and match it. In this case, when some banks announced a debit fee increase, others did not follow the leader. As a result, it's not surprising that the banks that were trying to increase debit fees felt forced to rescind them before they went into effect.

This is all too reminiscent of banker efforts to charge for teller transactions many years ago. A terrible customer backlash led management to forgo teller use charges. However, it led to different forms of product packaging, which is a behavioral economics approach: Some banks offered a variety of discounts for not using the bank teller. In that instance, a behavioral economics approach changed a lose-lose scenario to a win-win.

GMJ: But most banks have shareholders. Don't those shareholders expect banks to make up the lost revenue?

Dr. Jacobe: Of course, and banks have approached this in various ways. Many banks have instituted new fee structures and/or cut services. Generally, they have suffered significant customer defections and a loss of loyalty and engagement among those customers who remain. These changes in the bank operating model -- and in combination with the overall decline in Americans' confidence in the nation's banks -- may explain at least in part why bank loyalty fell sharply as 2011 came to a close.

Given the current regulatory outlook -- and the recess appointment of Richard Cordray as the first head of the new Consumer Financial Protection Bureau -- it seems likely that the bank operating model will continue to change and evolve in the months and years ahead. Instead of making product and service adjustments in the traditional finance-driven way, bank management would be well-advised to make these changes in a customer-centric way -- and in a way that reflects behavioral economics.

GMJ: You mentioned customer engagement. How can banks promote customer engagement when consumers may be wary of the banking industry overall right now?

Dr. Jacobe: That's another area that needs some behavioral economics application. Given the changing banking model, some banks have reacted by cutting back on employees. That may make financial sense in the short term. The fewer people on the payroll, the lower the operating costs, and cost cutting is required when revenues are declining.

But that short-term gain -- and precisely how it is achieved -- needs to be viewed in a behavioral economics context, because customer-facing employees remain consumers' most preferred provider of banking services and may be a bank's best hope for promoting customer engagement. Gallup's 2011 proprietary retail banking study showed that the most powerful drivers of customer loyalty and engagement remain branch visits and call center interactions with a real person. So the last place to cut should be front-line employees, because when fewer people are providing what matters most to customers, loyalty and engagement can easily take a significant hit.

GMJ: Give me an example.

Dr. Jacobe: Cut back on people too much, and customers get longer times in the branches and on the phone. If you have fewer people to serve your customers, if you don't spend the money training tellers and bankers, then you don't have enough people providing top-quality customer service. Worse yet, a dehumanized approach to customer service can play right into the story line of greedy bankers who don't care about their customers.

GMJ: So banks can't assume that their websites can make up the difference in customer service.

Dr. Jacobe: Gallup's research shows that Internet and automated channels aren't the same. Customers use them, and they have a significant place in building relationships, but they can't replace human interaction. This may be disappointing to companies that have invested a lot of time and money in new technology assuming it would take care of most customer needs and cut employee costs.

According to the study, though online and automated banking channels are important to relationship building, they have become table stakes in building customer relationships. Banking consumers continue to use new channels while showing little tendency to substitute for -- or abandon -- live interactions through traditional branch and phone channels. Of course, this doesn't mean things won't change over time, but this is the situation bank management faces today.

GMJ: Which means that employees are still important in building customer engagement.

Dr. Jacobe: Employee engagement is more important today than at any time since the Great Depression because of lack of confidence in the banking industry and the declining confidence in individual banking companies. Most Americans don't seem to fully recognize the vital role our banking system plays in the success of the U.S. economy. Fully engaged bank employees can be important advocates for banking and their institutions by explaining to consumers and small-business owners alike not only the key role banking fills but also why banking needs as many advocates as possible right now.

GMJ: How does behavioral economics jibe with customer engagement?

Dr. Jacobe: That 2011 banking study also shows that individual banking companies have been able to significantly differentiate their customer engagement and loyalty over the past several years. Customer engagement is built on a hierarchy of responses, and the bare minimum of them is that the company executes and fulfills basic expectations. Banks that are too short-staffed don't have the people to do what banks are expected to do and keep wait times short, thus failing to meet customers' transactional requirements.

GMJ: How can banks engage their customers?

Dr. Jacobe: Customers become engaged only when four emotional needs are met: they feel pride and passion for the brand they bank with, they believe the bank has integrity, and they're confident they'll always be treated well and fairly. It's financially imperative that banks provoke this response. Fully engaged retail banking customers are much more likely to say they intend to open a new account or take out a new loan over the next three months than are actively disengaged customers. And actively disengaged customers are much more likely to switch banks.

It's very difficult to emotionally engage people who are irritated by being kept in line for a long time. And the customer-facing staff knows it -- they are quite capable of looking over the counter and seeing lines of impatient, angry customers. When that happens, bank employees can be forgiven for losing some of their own engagement, which has costs of its own. Disengaged bank employees are not good brand or banking ambassadors. They're brand killers. Banks need employees who are positive about their banking institution and positive about the role banking plays in making the economy function.

GMJ: What's your outlook for banking in 2012?

Dr. Jacobe: U.S. banks face a hostile environment in 2012. The European banking situation is likely to continue to remain volatile and unresolved. The U.S. economy is likely to continue to struggle. Most importantly, the intense political environment of the 2012 presidential election is likely to increase the demonization of the nation's banks -- and the regulatory activity of the new Consumer Financial Protection Bureau -- while ignoring the vital role banking plays in the U.S. and global economy.

I think it is important that bank management recognize all aspects of this operating environment -- including Americans' perception of the banking business -- as they make their strategic decisions in the year ahead. They need to recognize that their business decisions can become political issues and act accordingly. Most importantly, they need to think behavioral economics.

-- Interviewed by Jennifer Robison

Bank clinginess is an underrated factor in why a lot of people stay with banks they don't like. Between the difficulty of transferring bill pay and other services, and banks' fussy rules on how exactly an account can be closed, banks tend to get all "Fatal Attraction" (or "Fear," if you prefer your psychotic paramours to be male) on you when you try to break things off.

From Robin Sidel of The Wall Street Journal:

Consumers are discovering that it isn't always easy to break up with a big bank.

When Ray Parente decided to pull his money out of Wells Fargo & Co. last month, he was told that he would have to discuss the decision with a personal banker at his local branch in Orange City, Fla.

Rather than wait in a long line to see the banker, Mr. Parente went to a teller window and withdrew all his money -- except for two cents. "I kept as little as I could in there to keep it open just to screw with them," says the unemployed real-estate broker in Deltona, Fla.

From stall tactics to unexpected fees and awkward conversations, other customers of big banks are running into similar snags when trying to move their money elsewhere.

Forcing a customer to show up in person to say goodbye may seem innocuous, if a little inconvenient. But what if you're disabled or bedridden? Or you've moved to a city where the nearest branch of your old bank is 100 miles away?

And that's not even including the overdrawn-with-fees death spiral that can happen with accounts like the one mentioned in the WSJ article. If Parente fails to close that account with 2 cents in it, he'll probably begin incurring a monthly maintenance fee, as he probably won't meet the minimum balance or direct deposit requirements needed to waive the monthly maintenance fees on a typical checking account these days.

After that happens, his account will become overdrawn, and then he won't be able to close it without getting it back to zero, which will mean another trip to the bank and more money out of pocket. If he fails to do that, the bank will continue hitting the account with monthly maintenance fees, until it closes his account for him. Then Parente will probably be reported to ChexSystems, which will prevent him from getting another checking account for at least five years.

That type of spiral can have serious financial consequences, possibly consigning Parente to the ranks of the unbanked, who typically pay more than bank customers for things like cashing paychecks and making cash withdrawals.

I blogged about a bill introduced in October that would have made it easier to switch banks by banning just these sorts of shenanigans. The comments I got were interesting. Some were supportive of the legislation, but a few were more of the "less QQ, more pew-pew" variety; they were basically of the opinion that switching banks is easy enough and why don't you stop whining already. An example, from a reader who frequently posts on the banking blog under the nom de plume "Wolverine":

What's so hard about switching accounts now?

If we really need governments to make this easier, than there is something REALLY wrong with us. I've done this before and it was simple.

The problem with that line of reasoning is, what may be true in Wolverine's experience may not be for other bank customers. There doesn't seem to be any set standard for what banks can require from customers to close an account, and that opens customers up to tactics that can cause everything from annoying inconveniences to serious financial consequences for the crime of not wanting to be bank's customer anymore.

Read more: Banks stall to keep customers | Bankrate.com http://www.bankrate.com/financing/banking/banks-stall-to-keep-customers/#ixzz1fm8FXIYD

In the aftermath of Bank of America's new $5 monthly debit card fee, politicians, consumer groups, and plain old angry consumers have denounced such fees as unfair and arbitrary, and pleaded with BofA and other financial institutions to get rid of them. But instead of asking these banks to reverse their decisions, perhaps it's more productive to ask why it is you're doing business with them in the first place.

As soon as Bank of America announced its new debit card fees--$60 a year for debit card usages for most customers, even if you only swipe it once a month--the reaction has amounted to something along the lines of: Hey, you can't do that!

The wheels were soon in motion to see to it that banks would be unable to proceed according to plans. Consumers Union first called for a federal investigation of the new debit card fees, and later publicly urged BofA, Chase, Wells Fargo, and other institutions to kill off such fees. Meanwhile, local lawmakers around the country are trying to join the fight. A Florida legislator is imploring the state to ban the fee, for example, and a Massachusetts city councilman is trying to get a resolution passed that would remove all municipal funds held by Bank of America. (The latter move appears mostly symbolic; the city, Springfield, had only $3,580 in a BofA account.)

While the anger over the fees is entirely understandable, the way the battle is being fought may be a bit misguided. If a restaurant raised prices or added odd fees out of the blue, would you start protesting the moves as unfair? Or would you just stop going to that restaurant?

(MORE: Wall Street Protests Get Specific: Could 'Bank Transfer Day' Pit Americans Against Their Big Banks?)

The StarTribune's Eric Wieffering writes that banks are being unreasonable for thinking they have the right to overcharge for debit card usage, and consumers are being unreasonable for thinking they have the right to use debit cards without paying for the service in any way whatsoever:

The foot-stomping frenzy about debit card fees reminds me of a sandbox showdown between 2-year-olds.

The Los Angeles Times' Michael Hiltzik is of the opinion that consumers should actually be thanking Bank of America because unlike so many other opaque, sneaky fees, the new debit card charge is upfront--and therefore easier to understand and avoid:

It's always best for consumers to know what they're paying for and how much, because customers can then shop around for cheaper services.

(MORE: Are Debit Card Fees Meant to Get Customers to Use Credit Cards More?)

Yahoo Finance's Dan Gross is another expert who welcomes debit card fees because, all things considered, it's better for everyone if banks charged for services used directly by customers, rather than trying to make money by gathering all the customer deposits possible and lending those funds recklessly to hedge funds, unqualified home buyers, and other banks. What's more, the rise of debit card fees should make it plain that bigger banks don't necessarily have better banking services:

Big banks' efforts to make banking more expensive might provide an opportunity for smaller, better-managed credit unions and community banks -- you know, the guys who didn't blow up and require government support -- to get a leg up on their much larger competitors.

So instead of stomping your feet in anger about bank fees, why not just shop around? Bloomberg cites a new survey revealing that 30% of consumers would switch banks due to debit card fees. Even more customers would avoid the fees in other ways: 43% said they'd start paying with cash or credit cards rather than debit card fees. (Interestingly enough, the banks may be pushing debit card fees to entice customers to switch to credit cards.) According to the survey, the poorer you are, the more likely you are to stick with your bank even if it starts charging debit card fees: 22% of low- to middle-income consumers (annual household incomes of $35,000 to $49,000) said they'd be willing to pay the fee, compared to just 14% of consumers with incomes over $100K.

The poorer you are, the more these fees hurt. So why would less well-off individuals be more willing to pay them? Because these people feel like they have fewer banking options, according to survey analysts.

In fact, there are other options. And in fact, since the debit card fees made news, consumers have been shopping around and switching banks in large numbers. Small banks and credit unions have seen an uptick in new customer accounts, as have online banks with minimal fees and decent interest rates (relatively speaking) such as PerkStreet Financial, ING Direct, and Ally Bank.

(MORE: How to Divorce Your Bank in 5 Easy Steps)

The point is: If you don't want to pay absurd bank fees, you could sign a petition or write your congressman or plot a campaign to try to get your bank to change its policies. Then again, you could also just start banking with an institution that doesn't charge ridiculous fees.

By Brad Tuttle | @bradrtuttle | October 20, 2011 |

Many people are protesting big banks fees by simply taking their business elsewhere. The growing movement to leave big banks, fueled by charges for formally free services and high interest rates, has started a growing trend in alternative finance firms that range from small banks and online pawn lenders to peer-to-peer lending services.

As the Occupy Wall Street protesters are quick to point out -- not many are feeling very trusting toward big banking institutions. But the changes in big banks are largely consequences of the 2008 credit crisis and subsequent regulations that are choking revenue sources. Banks have been quick to charge consumers for the difference in various forms.

As a result, credit unions and pawn lenders are emerging as an alternative and cheaper source of banking services. "Credit unions, which are effectively not-for-profit co-operatives, are stepping up to offer cheaper alternatives to the short-term, high-interest loans provided by payday lenders," reports Reuters.

Data from the National Credit Union Administration shows demand for short-term, small-dollar loans from credit unions rose 52% in the second quarter, and more aggressive selling will be seen in the third quarter. "The credit unions are also lobbying to have their business lending cap more than doubled to 27.5 percent of assets so they can better target small businesses unable to access bank funding."

Credit union popularity has extended to several online financing companies that provide loans to individuals and small businesses at significantly lower interest rates than big banks.

Reuters provides these examples:

• Online lender BillFloat, backed by Ebay's PayPal, offers a 30-day loan of up to $225 to consumers looking to pay their bills. The service, started two years ago, has an annualized interest rate of 36 percent, making it far cheaper than payday loans, where rates can be as high as 500 percent.
• Peer-to-peer lending site Prosper.com, which has raised more than $70 million in venture funding, connects people who want to borrow money with those who want to invest. It has more than $262 million in funded loans since it launched in 2006.
• Pawngo.com, an online pawn lender backed by Daylight Partners, Access Venture Partners and Groupon-backers Lightbank, offers up to $1 million to small business owners with collateral -- a shift from normal pawn operators where small loans of less than $1,000 are the norm.

The increasing demand for alternative financing solutions has also led to several talks of IPOs. "Regional Management Corp and Community Choice Financial have filed for initial public offerings this year, and Cash America said it would spin off its online lending unit, Enova International, in a $500 million IPO."

Interested in following this trend? To help you explore the emergence of smaller financials, we started with a universe of 200 small-cap financial stocks with market caps below $1 billion. We searched among them for the names experiencing significant levels of insider buying over the past six months.

From that universe, we further identified the ones with significant levels of institutional buying in the current quarter.

Insiders and institutional investors think there's significant upside to these smaller financials -- do you agree?

Use this list as a starting point for your own analysis. (Click here to access free, interactive tools analyze these ideas.)

List compiled by Eben Esterhuizen, CFA:

1. Prospect Capital (Nasdaq: PSEC  ) : Prospect Capital Corporation is a mezzanine finance and private equity firm that specializes in late venture, middle market, mature, mezzanine, buyouts, recapitalizations, growth capital, development, and bridge transactions. Net institutional purchases in the current quarter at 9.0M shares, which represents about 8.45% of the company's float of 106.45M shares. Over the last six months, insiders were net buyers of 128,266 shares, which represents about 0.12% of the company's 106.47M share float.

2. Pacific Capital Bancorp (Nasdaq: PCBC  ) : Provides a range of commercial and consumer banking services to households, professionals, and businesses primarily in the central coast of California. Net institutional purchases in the current quarter at 532.6K shares, which represents about 13.05% of the company's float of 4.08M shares. Over the last six months, insiders were net buyers of 3,495,414 shares, which represents about 85.67% of the company's 4.08M share float.

3. United Community Banks (Nasdaq: UCBI  ) : Operates as the bank holding company for United Community Bank that provides retail and corporate banking services. Net institutional purchases in the current quarter at 14.4M shares, which represents about 38.38% of the company's float of 37.52M shares. Over the last six months, insiders were net buyers of 165,750 shares, which represents about 0.44% of the company's 37.52M share float.

4. Central Pacific Financial (NYSE: CPF  ) : Operates as the bank holding company for Central Pacific Bank that provides commercial banking services to businesses, professionals, and individuals in Hawaii. Net institutional purchases in the current quarter at 15.5M shares, which represents about 70.01% of the company's float of 22.14M shares. Over the last six months, insiders were net buyers of 515,500 shares, which represents about 2.33% of the company's 22.14M share float.

5. Rockville Financial (Nasdaq: RCKB  ) : Operates as the holding company for Rockville Bank that provides a range of banking services to consumer and commercial customers. Net institutional purchases in the current quarter at 2.9M shares, which represents about 10.48% of the company's float of 27.67M shares. Over the last six months, insiders were net buyers of 92,070 shares, which represents about 0.33% of the company's 27.67M share float.

6. Cascade Bancorp (Nasdaq: CACB  ) : Operates as the holding company for Bank of the Cascades that offers a range of commercial and retail banking services. Net institutional purchases in the current quarter at 423.5K shares, which represents about 3.34% of the company's float of 12.68M shares. Over the last six months, insiders were net buyers of 6,265,990 shares, which represents about 49.42% of the company's 12.68M share float.

7. State Bancorp (Nasdaq: STBC  ) : Operates as the holding company for State Bank of Long Island that offers a range of banking services to commercial real estate owners and developers, small to middle market businesses, professional service firms, municipalities, and consumers in New York. Net institutional purchases in the current quarter at 473.9K shares, which represents about 3.13% of the company's float of 15.14M shares. Over the last six months, insiders were net buyers of 6,639 shares, which represents about 0.04% of the company's 15.14M share float.

8. Capital Bank (Nasdaq: CBKN  ) : Operates as the holding company for Capital Bank that provides general commercial banking products and services in North Carolina. Net institutional purchases in the current quarter at 965.3K shares, which represents about 6.91% of the company's float of 13.97M shares. Over the last six months, insiders were net buyers of 99,652 shares, which represents about 0.71% of the company's 13.97M share float.

9. SWS Group (NYSE: SWS  ) : Provides a range of investment and commercial banking, and related financial services to individual, corporate, and institutional investors, as well as broker/dealers, governmental entities, and financial intermediaries in the United States. Net institutional purchases in the current quarter at 2.3M shares, which represents about 12.6% of the company's float of 18.26M shares. Over the last six months, insiders were net buyers of 11,000 shares, which represents about 0.06% of the company's 18.26M share float.

10. Bridge Capital Holdings (Nasdaq: BBNK  ) : Operates as the bank holding company for Bridge Bank, National Association that provides commercial and retail banking services to small and medium size commercial businesses, business professionals, and retail customers in California. Net institutional purchases in the current quarter at 460.5K shares, which represents about 6.26% of the company's float of 7.36M shares. Over the last six months, insiders were net buyers of 1,083,610 shares, which represents about 14.72% of the company's 7.36M share float.

Could your bank teller go postal? Offering basic consumer banking services in the form of prepaid debit cards is just one of many ideas the U.S. Post Office is considering to boost its bottom line.

The government agency is in desperate need of revenue and raising the price of stamps -- to 45 cents for a letter starting Jan. 1 -- is hardly enough. Annual losses for the post office could reach $16 billion a year by 2016 unless Congress passes legislation that allows it to branch into other business activities, The Wall Street Journal reported.

The post office could also make money by offering diverse services, such as leasing its trucks to the private sector, acting as an operations consultant for retail shipping, or selling non-postal goods among other ideas, the Journal reported.

But expanding on a service it already provides -- offering basic bank transaction services -- could be a boon to millions of underbanked Americans. A report from the Post Office's Office of the Inspector General earlier this month suggested that the independent government agency move into the prepaid debit card business.

A U.S. Post Office spokesperson said that the organization is considering the recommendation, but hasn't made a decision.

Offering prepaid debit cards could help the growing number of low-income Americans who could find themselves marginalized by the rising fees at retail banks. With one in three people willing to change banks over fees, there are signals that many consumers are looking for new alternatives to their banks. The post office already offers basic transactions like check cashing and money orders and prepaid debit cards would be a natural evolution for the institution.

Add to that, the increasing emphasis on electronic payments. Both the government and employers are moving toward direct deposit for all payments, while many companies are channeling customers into paperless billing.

Would you use the Post Office as a bank if it offered reloadable and prepaid debit cards? We want to hear from you.

Significant restructuring appears to be underway in the personal finance market as major banks look to avoid what's estimated to be a $9.4 billion revenue loss as a result of the Federal Reserve's cap on debit card interchange fees that takes effect on Oct. 1. 

Many banks, including Wells Fargo, (WFC: 24.66, +0.21, +0.88%) JPMorgan Chase (JPM: 31.28, +0.80, +2.64%) and SunTrust (STI: 18.47, +0.44, +2.44%) have already eliminated their debit card rewards programs. Regions Bank, along with the three aforementioned banking institutions, is experimenting with new monthly fees for debit card use. Bank of America (BAC: 6.30, +0.14, +2.27%) is implementing additional requirements that customers must meet in order to avoid monthly fees as high as $15.

In light of these simultaneous debit card rewards decreases and fee increases, the question must be asked: Should we be looking for checking account alternatives?

Whether or not replacing your checking account is an immediate concern really depends on your particular bank. However, given that prepaid debit cards have been the fastest growing method of payment over the past two years and are not subject to interchange fee caps and can basically serve the same purpose as a checking account, they might be worth checking out.

With a prepaid card account, you can directly deposit your paycheck, pay bills online, transfer funds between accounts, access your funds through a MasterCard/Visa card, etc. You just can't write paper checks with a prepaid card, and for many of us, this act is no longer truly necessary as our financial lives become further digitized.

This fact has not escaped major banks, which recognize that prepaid cards and checking accounts are slightly different means to the same personal finance end and that one is regulated (i.e. less lucrative) while one is not (i.e. more lucrative). Attractive new prepaid cards are already popping up, and you can expect banks to begin steering their customers to these and other new products that will emerge after the debit card interchange fee cap takes effect in October.

Even in the current landscape, a prepaid card can essentially serve as a free checking account if used correctly. According to a recent Card Hub report , which examined cards from five of the most well-known issuers, a Green Dot prepaid card would be free to use by a consumer who deposits a paycheck of at least $1,000 each month and only visits in-network ATMs.

Still, given that prepaid cards were not subject to the financial reform laws and regulations that were enacted in response to the Great Recession, transparency can be an issue, particularly in terms of the plethora of fees. Different prepaid cards have lots of different fees for different things and call them by different names, which can obviously make product comparison difficult.

You may therefore feel more comfortable sticking with the known quantity for now. Whatever you decide, however, make sure to keep an eye on prepaid card offers in the coming months.

Source: Consumer Federation of America

Washington, DC ---One year after the Federal Reserve required banks to get customers' permission to charge overdraft fees on debit card transactions, fees charged by banks have not dropped for what amounts to short-term loans. While some banks have modified the order in which they process payments from accounts, most banks continue to pay the largest transactions first, which can drive up overdraft revenue at the  expense of struggling families.

The Consumer Federation of America (CFA) today released its updated survey (see link below) of the fourteen largest banks' overdraft fees and practices and urged consumers to tell the Comptroller of the Currency to strengthen proposed guidelines for bank overdrafts.

"Bank overdraft fees at the largest banks remain steep, ranging from $33 to $37, and far exceed the typical $20 debit card overdraft," stated Jean Ann Fox, director of financial services for CFA. "Some banks have hiked the number of overdraft fees consumers can rack up in a single day to as many as ten, costing consumers as much as $370 in just one day."

In the last year, BB&T doubled the number of overdraft fees it charges per day, capping fees at 8 per day, and Regions Bank raised its daily limit from four to six per day. Only TD Bank reduced the number of fees per day from six to five. The CFA survey found two-thirds of the largest banks pile on second and multiple fees if consumers do not repay overdrafts in just a few days. SunTrust charges a second $36 fee after seven days while JP Morgan Chase adds $15 after each five-day period an overdraft remains unpaid.

Overdrafts and fees must be repaid immediately to avoid extra fees or as soon as the next paycheck or benefit check hits the customer's account. Banks repay themselves directly out of the consumer's funds, making overdrafts balloon payment loans and the top priority for scarce family funds.

Most large banks solicit their customers to opt in to paying overdraft fees for debit card purchases and ATM withdrawals that could be denied for no fee. Notable exceptions are Citibank, which never charged overdraft fees for debit card and ATM transactions, and HSBC which no longer permits overdrafts by debit card at the cash register or ATM. Bank of America does not permit debit card overdrafts for single purchases, but in the last year resumed permitting consumers to overdraw at the ATM at a cost of $35 per transaction.

Manipulating the order of processing payments from accounts results in more fees for consumers who struggle to make ends meet. In 2010 almost all major banks processed payments largest to smallest or reserved the right to do so. In the last year, three banks improved the order in which they process payments from accounts. Citibank now processes checks smallest to largest and will begin processing ACH payments smallest first in October. Fifth Third and Wells Fargo made changes in the order in which some transactions are paid which should lessen the number of overdraft fees triggered. But most banks haven't improved their posting process.

"Banks extend credit when they pay overdrafts with the bank's money," Fox noted. "If the cost is computed as for a payday loan, banks are charging triple and quadruple-digit rates to borrow money when all the fees are added up."

The highest cost of a $100 overdraft loan repaid in two weeks, if computed as a closed-end payday loan, is 3,259% APR at Fifth Third Bank, 2,799% APR at RBS Citizens, and 2,574% APR at PNC Bank. There is no legal limit to the size of overdraft fees, the number of fees banks can charge, or the length of time consumers have to repay these loans.

"Consumers need stronger protection from abusive overdraft fees and practices," Fox noted. "Regulators should prohibit banks from manipulating payment processing order to drive up overdraft fees and should require banks to offer consumers the lowest cost overdraft coverage for which they qualify. Banks should be prohibited from charging for overdrafts triggered by debit cards that can be denied at no cost to consumers," she urged.

Investors and consumers alike could reap the benefits as more and more start-ups step into what used to be the exclusive domain of traditional financial companies

At PerkStreet's downtown headquarters, a dozen employees - mostly twentysomethings in jeans and sneakers - are chatting or pecking at laptops in a few rooms surrounded by blond Ikea furniture and green partitions.

As at many tech start-ups, workers are paid partly with stock options. There's no dress code. Notes about what each worker is doing are scribbled on glass panels on one of the walls.

But PerkStreet isn't developing a new video game or social networking site.

Instead, it's marketing checking accounts, competing with financial giants such as Bank of America, Citibank, and Wells Fargo. The company, founded three years ago as PerkStreet Financial Inc., has already attracted tens of thousands of customers by offering a debit card with the highest cash-back rewards in the country.

PerkStreet is one of many companies in Boston and nationwide using technology to reinvent financial services. Call it Finance 2.0. Call it fin-tech - short for financial technology. Whatever you call it, the sector is exploding.

Last year alone, venture capitalists invested $834 million in scores of US financial technology firms, up nearly a third since 2008, according to CB Insights, a New York information services firm. So far this year, venture capitalists are on pace to pour more than $1.4 billion into this industry, up 75 percent from last year.

In Massachusetts, financial start-ups have collected more than $78 million in 16 deals since 2008. "Financial technology is exploding with 2011 already poised to be a breakout year,'' said CB Insights chief executive Anand Sanwal.

For consumer, it could mean more options than ever for banking and investments. Some companies are marketing products directly to consumers; others are developing technologies to allow financial institutions to offer new services, such as mobile payments.

Industry executives say a number of factors are driving this growth. First, consumers are increasingly comfortable with online financial transactions. The spread of smartphones and other mobile devices has created new ways to conduct business. And many customers are dissatisfied with traditional financial institutions.

"It looks like an area that can be disrupted,'' said Eric Mattson, chief executive of the Finovate Group, which runs a conference dedicated to financial technology start-ups.

Financial tech firms are focused on everything from banking to investing to digital payments. For instance, Square Inc., launched by Twitter cofounder Jack Dorsey, is offering a free app and thumb-size credit card scanner that plugs into a smartphone or iPad, allowing almost anyone to accept credit card payments.

The San Francisco company pockets 2.75 percent of every transaction.

June 14, 2011|By Candice Choi, Associated Press

Free checking accounts may be one step closer to extinction. Starting July 21, new rules are apt to sharply limit the fees banks can collect from merchants when customers pay with debit cards. An attempt to delay implementing the rule was narrowly defeated, meaning banks will be looking to make up an estimated $14 billion in lost revenue.

Here's what consumers should watch:

■ Free checking: It's still relatively easy to find. But it's more likely there will be conditions. You may have to do all your banking online, for example, or maintain a minimum balance.

■ Debit rewards: They may soon be available only to top customers, if at all. In April, Wells Fargo stopped enrolling new customers in its debit rewards program. It hasn't made any decision on whether the program will continue for already-enrolled customers.

Chase has ended debit rewards for new and existing customers.

■ ATM fees: Use another bank's ATM and you might be slapped with two fees, one from your own bank and one from the other bank. TD Bank, for example, will charge $2 when its customers use another bank's ATM.

Chase this year tested ATM fees of $4 and $5 for noncustomers who used its ATMs in Texas and Illinois, but dropped the test without explanation. The fees in those states were lowered back to $3.

■ New fees and products: Chase, for example, is testing a $3 monthly fee in Wisconsin for checking account customers who want a debit card.

Or customers who aren't able to maintain a minimum balance may be offered a prepaid card, instead of a checking account. Prepaid cards, which are not subject to the new cap on merchant swipe fees, are not tied to checking accounts and can be reloaded with cash.

■ Deeper relationships: Banks are increasingly looking to deepen customer loyalty and capture a greater share of their business. So you may be offered fee waivers on checking accounts for opening additional accounts, whether it's a credit card, savings account, or mortgage.

Bank of America is testing tiered accounts in Massachusetts. Those who maintain higher balances across their accounts are rewarded with perks. Customers who select the highest level of service, for example, can earn rewards at five times the normal rate on select purchases with their credit cards.

Meanwhile, those who want a free checking account without meeting any conditions at Bank of America now have to do their banking online and opt for e-statements.

"A lot of institutions are going to be pulling back on everyone except their best customers,'' says Ken Clayton, chief counsel for the American Bankers Association. "The vast majority of individuals who don't have that kind of relationship will lose access to certain benefits.''

Candice Choi writes for the Associated Press.

The National Consumer Law Center just released a report on something that's been a pet peeve of mine for some years: states' increasing reliance on pre-paid cards to distribute unemployment compensation, rather than checks. (h/t Susie) As the report explains, issuing funds via a card is much cheaper for the states. But what's really happening is that unemployment recipients end up paying for the cards out of series of fees the banks issuing the cards charge (which violates the law that says administrative costs should not come out of benefits).

The report spells out in detail how banks are screwing unemployment recipients in which state:

• US Bank refusing to let AR post its fee schedule
• PNC requiring recipients to work with customer service to transfer fees to their own bank account in IN
• Chase charging $1 for the very first in-network ATM withdrawal in TN
• Chase charging $2.75 for out-of-network ATM withdrawals in WV, even in areas without convenient access to a Chase branch
• Chase charging $.25 for cash back with a purchase in TN and RI
• Chase charging $.10 for every point-of-service use after the second one in CO
• Chase charging $.25 for PIN transactions in ME and TN
• US Bank charging $20 overdraft fees (on pre-paid cards!) in AR
• Chase charging $1.50 for denied transactions in MI and WV
• Chase charging $.50 to check a balance and $1 for insufficient funds in RI
• Regions Bank charging a $2.50 90-day inactivity fee in AL
• Chase charging $12.50 to issue a check to close out an account in CO and CT

Check out this state-by-state summary to see what your state's card charges and how that compares with other states.

This list, of course, demonstrates another thing: Chase's significant role in the market (it serves 13 of the 40 states that use pre-paid cards) and-aside from US Bank's egregious overdraft fees-its use of the most abusive practices.

That's notable because Chase's parent company-and its CEO, Jamie Dimon-is also taking the lead in threatening to cut off poorer consumers because the government wants to limit what debit card issuers like Chase can charge merchants.

Bank executives have said they will raise their fees to compensate for losing debit card processing revenues.They predict that some people will be unable to afford the fees, forcing them out of the banking system into the realm of check cashers and payday lenders.

The term that the banks use for this is "unbanked." The rules "will have the adverse consequences of making a portion of current bank clients unbanked.

You will not be able to profitably serve them," Dimon told analysts during the bank's fourth-quarter earnings conference call Friday.

About 5 percent of today's banking customers "may be pushed out of the banking system," he said.

You see the nice trap Dimon is setting for those who don't profit mightily by sucking at the federal teat, like his bank does? Unbanked consumers are precisely those who, if they receive unemployment, will rely on these cards and have to pay their usurious fees. So after forcing them out of the banking system because JP Morgan refuses to cut its escalating profits in response to Dodd-Frank, JP Morgan will still profit off these people by nickel and diming them at the time they can least afford to be nickel and dimed.

By: emptywheel Friday May 13, 2011 7:54 am