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Commentary | PERSPECTIVE ON FINANCIAL MERGERS

Giant Banks and the Little People

The new combines may have lower costs, but the price they pay may be more government scrutiny and regulation.

April 15, 1998|MARTIN MAYER | Martin Mayer is a guest scholar in economic studies at the Brookings Institution in Washington and the author of "The Bankers: The Next Generation" (1997)

Bank mergers by definition are high finance, and they are not driven by thoughts of consumer benefits. Computers have brought economies of scale to banking. In the old days, a new account added to a bank's expenses about as much as an older one, mostly in teller and clerk time. Now computers stand there and run through all the accounts every night. And when you merge two banks, you save money automatically, because the consolidation means that some of the checks that had to go out to the Federal Reserve or the clearinghouse can be settled immediately.

From the financial institutions' point of view, data processing has virtually eliminated the differences between bank deposits and savings accounts, credit card advances and installment loans, money market funds and mortgage bonds, annuities and insurance. Efforts by government to keep these things separate are overwhelmed by technology. The same machines that handle an investor's income from her stocks and her payments to finance them can be used to process her salary checks and credit card bills. Stockbrokers can't "take deposits"--that breaks the law--but more checks are written on Merrill Lynch "cash management accounts" than on any bank in the country except Bank of America.

From a consumer's point of view, financial products remain quite different: Some are spending money, some are ways to hold or protect wealth, some are ways to build wealth. On the other side of the ledger, some are long-term borrowing to be paid back slowly, like mortgages, some are medium-term obligations to pay for automobiles or pianos, some are revolving credits because America is full of people who would rather have money in the bank earning 5% or 6%, even if the price is carrying a credit card debt that costs 18% or 20%. Because the consumer has different purposes for her purchases of financial products, there isn't much sense of competition among them.

Some people play the financial system intelligently and successfully. They take the lemons from a mailbox full of solicitations by credit-card companies and squeeze out the lemonade from a bushel of "introductory rates" to pay off their previous creditor. They grab for tax benefits, illegitimately but successfully, by borrowing on their homes for other purposes. They finance vacations with low-interest margin loans on their stocks.

More pay no attention. Historically, banks have competed by the convenience of their branches, not by the quality or price of their offerings. Complicated products, like the credit life insurance that supposedly assures you that your family can keep the car if you die (but really assures the bank that its loan will be paid), have been outrageously overpriced: New York state now has a law that forbids banks to take profits from such policies greater than 52% of premiums. The most profitable activity at any bank is bouncing a check, which costs very little but carries a high fee.

Banks are not alone in ripping off the customer who doesn't understand about finance. Brokers cold-call whole communities to sell initial public offerings on which they make huge commissions. Unscrupulous insurance agents bait and switch customers to earn bonuses. Prudential is paying penalties in the billions of dollars for failing to police its agents.

Indeed, employers as a group have disgracefully exploited the innocence of their low-paid workers, who once were paid cash, and then were paid by checks that could be cashed free at the employer's bank and now get a check that leaves them on their own. Next to the mutual fund, the fastest growing financial enterprise is the wretched check-cashing shop that charges 2% or 3% of face value for its services. When the Treasury Department held hearings in the Bay Area about ways to create bank accounts for poor people, the head of an East Palo Alto community group reported on a survey that showed the residents of that city had an average annual income of $16,300 and an average expenditure of almost $350 a year to cash checks.

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