Consumer Banking Tip: the Devil is in the Details

As the euphoria of averting the collapse of the world’s banking system wears off, it is clear that banking’s halcyon days have ended and its road to full recovery will likely be long and difficult.

The good news is that the Fed is managing to keep the yield curve steep. As a result, banks today are able to borrow money effectively for free (have you checked your bank’s interest rates lately?), lend at much higher rates and thereby generate significant profit margins. And, with tons of cash parked in banks and reluctant to move back into the stock market, total bank profits are likely to continue to be substantial. Those profits will be needed to ultimately offset the unprecedented asset losses and write downs continuing to occur on bank balance sheets.

The bad news is that all the pending bank failures, mergers/acquisitions, and cost reductions are negatively affecting the quality of the customer experience. Bank staffs are increasingly short-handed, untrained and inexperienced, and with banks revising their operating procedures according to those of new corporate acquirers and new federal banking regulations, it is no wonder customer service is suffering.

Even the banking giants likely to survive and thrive in the future are as deficient in their customer service as many of the smaller community banks that will likely disappear from the treacherous banking landscape during the next few years. Consequently, in order to insure a satisfactory level of customer service, customers will need to take a more active role in managing their banking. The following tips should assist you in that mission:

Know the FDIC insurance rules and limitations. Make sure you set up your accounts in compliance with those rules and that your accounts are fully FDIC insured. Bank personnel don’t always communicate accurately or completely when answering questions about those issues. However, many banks will offer you a free FDIC brochure that tells you everything you need to know on the topic, or you may download it yourself directly from the FDIC via the internet.

Banks believe that paper is so twentieth century. Many banks will do almost anything to avoid giving you a paper receipt that specifies the important details of your account, such as the interest rate, expiration date, balance, etc. Many look at you dumbfounded when you remind them that CD is the acronym for “Certificate” of Deposit. They sincerely believe that in this age of online account management hard copies that verify that you’ve turned over your life savings to them are completely unnecessary. Insist on receiving that paper receipt, as it is often useful in revealing clerical mistakes that you will then be able to correct immediately.

Verify account tax IDs. Always check the accuracy of account tax identification numbers, which are typically social security numbers for individual accounts. Do it every time you receive an account correspondence or statement. Wrong numbers on year-end tax forms, such as 1099s, may lead to problems when you file your income taxes. Don’t be surprised if you find yourself reporting disparities often, as some banks claim to have several files for accounts all of which do not automatically revise your change. Another typical excuse for such errors is that bank computer software may override and undo revisions according to some corporate compliance measure. Banks readily blame their computer software for many of their administrative screw ups.

Account titles can be problematic. Pay very close attention to how you title your accounts. Trust accounts can be particularly confusing, even when titles are specified by competent legal counsel. A typical trust account title might be “John Doe Revocable Trust UA (under agreement) dated 01/01/09.” The next line usually indicates the names of the designated trustees, in this example let’s say “John Doe and Jane Doe Trustees.” Such simple time-tested legal language should be foolproof. However, that language is often ambiguous to bank lawyers and their amateur acolytes who administer your account. Some interpret the “and” between trustee names to mean both trustees must sign off in order to execute transactions. They believe that if the intent is to have either trustee act unilaterally, then the title should read “John Doe or Jane Doe trustees.” Others believe that if the intent is to have either trustee act unilaterally, the title should refer to them as “co-trustees.” When the lawyers don’t agree, everyone in the bank gets to offer an opinion. By the way, your opinion doesn’t count.

Keep bank account-related documents handy. Periodically, and certainly every time a bank is acquired or merged with another, new account administration procedures are implemented, which often require account owners to verify the ownership structure of their accounts. Be ready to take all pertinent documents to the bank frequently to satisfy those new requirements. As unfair as it sounds, banks apparently take no responsibility for verifying once-and-for-all your authority over your accounts, so be prepared to clarify your accounts periodically.

Avoid automatically renewing CDs and other savings accounts. Do not lose sight of the fact that most banks exploit your laziness or lack of vigilance to seek the best financial terms for your accounts. In the old days, expiring CDs were automatically rolled over with the reasonable expectation that your renewal interest rate for a certain term would compare closely to the prevailing rate for that term shown on the market yield curve. Today, promotional rates are offered for bank-favored maturities and all other rates are set artificially low. Those bank-favored maturities change frequently, which almost guarantees that your account with its set maturity will not receive a favorable rate upon automatic rollover. Worse yet is the fact that promotional rates are often two or three times greater than the rates for other maturities. So, if you miss the promotional rate, you are likely to receive a mere fraction of the prevailing market rate for your account. You must actively manage your CD rollovers.

Frequently monitor money market account rates. A casual inspection of your monthly money market account statement will often reveal a slight but continual reduction in your interest rate every month, even though other current money market rates at your bank might be much better. You need to actively manage your money market accounts and inquire constantly about upgrading your account to prevailing money market rates.

Beware of bank investment services. It’s bad enough you need to struggle to get a banker’s attention to assist you with your legitimate account needs, but these days you must fend off the army of bank-sponsored financial consultants who may be trawling your accounts in an effort to entice you to invest your bank account money into non-bank (non-FDIC insured) and often much riskier types of investment accounts. Be able to differentiate between bank and non bank types of accounts.

Avoid banks that really don’t want your business. You may have already noticed that banks seem unwilling to offer preferred customer rates for savings accounts and loans unless you are willing to make some concession to them, such as opening a direct deposit savings account or checking account. In the current low interest rate market environment preferred customer rates are substantially more favorable on a percentage basis than other rates. Clearly, they don’t want your business unless you submit to their concessions and you don’t need their below market rates. So, do them and yourself a favor and consolidate your banking needs with a few banks. The recent decision by Congress to extend until year-end 2013 the FDIC insurance increase, from $100,000 to $250,000 per account, will make that consolidation easier for everyone.

What if Big Brother (Government) Turns Out to be a Bully?

Harsh recent criticism of our free market economic system has resulted from the long standing belief that the greed and self-interest that drives our private sector were the major culprits of our current financial and economic mess. Some of those critics now believe that government control and regulation offers the only solution to the problem and many elected officials are seizing the opportunity to insinuate government into many of our major industries, including automobiles, banking, energy, healthcare and many others.

Although the free market system is far from perfect, history has clearly demonstrated its superiority to all others, especially systems where government has primary responsibility for driving the economy. And, if “greed” and “self-interest” are the catchwords of private sector capitalism, “corruption, waste and inefficiency” have become common descriptors of the public sector and government.

Furthermore, somewhat ironically and despite the rap against the private sector, it is clear that government was complicit in the acts that led to our financial debacle. First, during the prosperous 1990s the Clinton Administration paved the way to financial ruin by implementing a public policy that encouraged home ownership among our most economically-challenged and pressured banks into providing financing that ultimately led to an explosion of sub-prime mortgage lending. That policy, coupled with others that encouraged banks to lever up their balance sheets as an easing monetary policy reduced interest rates to multi-generational low levels, created a financial maelstrom we have barely been able to escape. In addition, the Bush Administration, by its own admission, knew this disaster was coming and claims to have urged Congress to take preemptive action to prevent it. It should have tried harder.

America is now being asked to choose between the free market’s invisible hand and the dictatorial hand of government. A free market system allows us to choose the products we wish to consume; it relies on prices set by the interaction of supply and demand, which ensures that suppliers offer products consumers want to buy. A government run economy encourages us to vote for public servants who we must trust will represent our interests; it relegates production decisions and who and how much we consume to public sector bureaucrats. Do you want the government telling you what car to buy, how much energy to consume, and what healthcare you will receive?

If you still believe bigger government is the answer and have faith that our government will serve our best interests, consider the following: First, even though government does not take private sector pride in greed and profit motives, it trades money for power and plenty of both is involved in greasing the gears that drive government and its participants. Second, many of those wanton capitalists from the private sector ultimately seek government office, and not necessarily because they feel an overwhelming desire to serve the public. Third, Barack Obama did not become president by accident; he had the greatest financial backing of any presidential candidate in history, especially from the liberal rich and famous, and received a resounding if tacit endorsement of most of the mainstream (read liberal) media. Contributions to all election campaigns last fall totaled more than one billion dollars and media support for Obama’s candidacy could not have been more apparent. It should be no surprise to anyone that our president (who campaigned as a moderate) should be pushing an emphatically liberal agenda, instead of pursuing the center-right interests of the American public who voted for him.

The last 100 years of world history has proven that economies work better as free markets than under government control. But even capitalists know that there is a role for government to play in correcting the failures of free market capitalism. That’s what our government should be doing, not attempting to supplant our free market system altogether.