Are Banks Making too much Profit

There aren’t many consumers that would disagree that the modern banking industry has created a means of profiting off of the misfortune of others.  Those that need the money the most are the ones that are hit the hardest with fees.  With banks looking to obtain as much money as possible off of each customer they look to find ways to exploit the poor banking habits of their customers.  In the process, banks are making massive profits off of a service this isn’t much better than a wall safe or shoebox. 

Sadly, banks are only able to charge outrageous fees because consumers have allowed it to happen.  As customers of the bank we are the ones that have made it easy for the banks to make money off of our hard earned dollars.  We are the ones that give our money to the bank for safe keeping.  We not only allow the banks to make money by lending out dollars that we put into savings but we allow them to take money during those times when we don’t pay as close attention to our accounts as we should.  In fact, we have created an industry that takes without really giving back.  There aren’t many companies that penalize their customers and keep them around, but for some reason we allow it to happen when it comes to banks.  We are the ones that create this free market economy and have created massive banking profits in the process.

The great thing about our free market economy is that it puts the consumers in charge of what happens in the market. We are the ones that determine the pricing of products by purchasing more or less. We are the ones that determine what items will be produced, by purchasing more of it. We also can determine how high our bank rates will be by choosing only banks that have low rates or just accepting the banks with high fees and rates.  Essentially, if you really look at the overall picture of the banking industry consumers are the ones that have allowed fees to get out of control. 

Think about the banking industry like you would any other type of business and everything would seem absolutely absurd.  Look at the fees that are being charged for accounts.  Rather than looking around for the best fees most consumers simply pick a bank that is close to their home.  We tend to assume that we aren’t going to make mistakes in our accounts and because of that we have shown banks that they can pretty much charge whatever fees they want because we’re still going to signup for accounts regardless. 

Once one bank gets away with charging higher fees the other banks are going to realize that it is in their best interest to do the same.  It is all about making the most for the company.  You can’t fault a bank for making the money that consumers allow them to make.  It is how the free market economy works.  If we don’t choose their competitors and reward those that have lower fees then we are allowing high fees to continue.  With the high fees come the high profits. 

Keep in mind we’re not just giving them money from fees, we’re letting them borrow our money and allowing them to do so without any real reward.  Most banks have found that they can get away with offering virtually no interest in return for the use of their customer’s money.  This means banks are able to run an operation that is incredibly lean and mean increasing profits even further.  By not choosing a different bank that pays higher, again we’re allowing our banks to get away with making money off of our dollar.  The bank can’t really be faulted for this.  This is the fault of the consumer that is simply allowing the ground work to be created for higher profitability.  If a retailer could get away with charging twice as much for all of their goods without pushing a consumer to a competitor they would.  Banks do this all the time but they get away with it. 

Does risk justify it?

Banks are taking on massive risk. Massive risk is generally rewarded by the potential for a massive profit. The same is true in investing as well. The idea is that if they are willing to take such a large risk, then they should be able to make a large profit at the same time whenever the market allows for it. What the banks are really taking advantage of are the customers that are raising their risk. Those customers that overdraft their accounts are creating a hazard for the bank, so the bank charges them a fee for creating this hazard. Originally these fees were meant to prevent people from overdrawing their accounts.

After a while, people began to just accept these fees and overdraft their accounts on a regular basis. As the risk rises for the bank, they have to raise their rates in order to help combat this raise in risk. If they don’t, their stockholders are going to become nervous by the number of accounts in default, or that are overdrawn etc. This essentially means these rates are created as a means of satisfying their numbers. They feel that if rates are high enough then consumers will not be willing to overdraft their accounts. This will result in much less risk for the bank.

While the bank makes a great deal of money off these fees, the major focus isn’t fee income; rather they are more focused on the elimination of risk from the business to a level that is satisfactory. Sure the banks make a lot, but remember, they also risk a lot.