Banking Connects Blog

A songwriter in the 60’s proclaimed that “freedom is just another word for nothing left to lose,” and then something along the lines that something which comes with a cost isn’t worth the hassle. Most Americans dislike the idea of paying for something that they at one point received for free, which is relevant in light of some ATM owners beginning to impose a surcharge on non-customers for using their machines. Note the difference between a customer being charged for using a machine not belonging to his bank and being charged as well by the ATM company itself. In such a case the total cost of using an ATM can be almost twice as high.

Proponents of maintaining the status quo of cheaper-to-use ATM machines (excluding the foreign fee, which is the fee charged a customer for using another bank’s machine) explain a well-known fact that banks prefer ATM’s over tellers; operating a machine and providing the service costs a bank approximately 36 cents versus the $1.06 it does to pay a teller, according to Rose Peter, author of Commercial Bank Management. That’s less than a third to operate an ATM. In fact, some banks have instituted a $3 charge for transactions that can be completed at an ATM machine.

Early in 1996, Master Card-owned Cirrus and Visa-owned plus dropped their long-held ban on charging network members for using their ATM’s, explaining their decision in light of competitive pressures from other regional networks that had already done so as well.

And yet a young New York entrepreneur is proposing that advertising can be used to provide customers with free ATM usage. 25 year-old Clinton Townsend has created Free ATMs NYC, which runs advertisements on a 15-inch screen at select ATMs. After performing a transaction, the customer receives a discount coupon for a nearby place of business or restaurant, which grants them free withdrawals.

Townsend’s hope is that the idea will catch on, and he’s already heard from several third party advertisers and the first one has been installed at the Knitting Factory, a bar in the Brooklyn Williamsburg neighborhood.

Manhattan District Attorney Cyrus R. Vance, Jr. indicted three Canadian citizens, brothers Iordan and Nikolai Ivanov and Dimitar Stamatov, on Wednesday November 16th for “skimming” ATM machines. “Skimming” refers to the illegal act of copying information contained on the magnetic strip of an ATM or credit card. A successful skim allows the thief to create a fake card containing personal details and use it freely to commit identify fraud, take out loans and borrow money in its owner’s name. The three men managed to steal customer information by installing a skimming device — a 1-inch plastic lip that attached to the ATM card slots — as well as hidden cameras that recorded PIN numbers.

The thefts took place over a five-day period in January of this year within a one-mile radius of Union Square, a public thoroughfare in the Manhattan district of New York City and the spree involved 11 different ATM machines at four Chase branches.

According to the reports, they managed to steal more than a quarter of a million dollars from approximately 1,500 people. The men as well made more attempts to target the ATM’s, collecting more than $264,000 in fraud the first time and $20,000 the second time, which they used in Canada, Arizona and Illinois. The two brothers were caught on May 24th when they tried to remove the skimming device and were arrested on 785 Broadway. Much of the money has been reported as having been wire transferred using Western Union to Bulgaria, where the three men are from.

A Chase spokesperson has said that the bank reimburses losses caused by fraud. Approximately 15 people were caught and arrested for skimming in Manhattan this year.

Some ways to protect yourself from skimming are:

• Cover the ATM number pad with your hand when entering your pin number.
• Make sure nobody is standing behind your or loitering in the area.
• Do not use an ATM machine that looks suspicious and report it to the institution.
• Do not let a shop employee swipe your card out of your sight.

What problem could big banks have with one man? The inventor of a digital check processing system, which he patented, has become a millionaire due to their dependence on the technology. The banks’ main argument relates to a subtle detail known in the patent world, that business method patents, which are patents that secure a specific task performance but not the equipment itself, are based on a misapplication of patent law. The staple use of the digital check processing system has motivated an attempt on the part of big banks to remove Claudio Ballard from the equation.

They have as well enlisted the help of New York’s Senator Charles E. Schumer, who succeeded in passing a bill in March with an appended overhaul provision that would expropriate the technology from Ballard. It would also grant banks a federal re-examination looking into cases where they have been accused of violating patent law.

The patent office has evaluated and validated Ballard’s patents, which the bill would take into consideration by expanding its scope in light of different factors.

While the banks insist that patent law has been misused, their move has drawn criticism from supporters of Mr. Ballard’s DataTreasury Corporation of Texas. According to their spokesman, John Feehery, the move is “a specific provision aimed at a small company.” To back this claim, their supporters have argued that the banks have focused on this provision’s relationship with this specific type of technology versus ecommerce in other industries.

Even though Mr. Schumer says that the majority of New York’s largest banks have already settled with Mr. Ballard, Mr. Ballard and his Texas DataTreasury have used jury verdicts and royalties to hire their own Washington lobbyist.

The Financial Services Roundtable, the Securities Industry and Financial Markets Association and the Independent Community Bankers of America said that they would fight against the bill if it does not include financial exemption from the check-processing technology. Patent law will also be affected by the bill, requiring an inventor to be the first to submit a patent file versus being the first to submit an invention in order to obtain a patent. Small businesses see this as potentially leading them to be beat to the patent office and therefore oppose it.

The bill is also being supported by Mr. David J. Kappos, the patent office directory, who according to Mr. Schumer has helped him write the provision.

Mr. Steve Bartlett, head of the Financial Services Roundtable to which Mr. Schumer belongs, claims that “patents of dubious quality” are at core of the problem. Mr. Ballard, a computer engineer who has built his career in the technology industry and the founder of several companies, dislikes the allegation that he and his company known for “exploiting dubious patents.” Ballard offers, “I am an expert at systems integration, and I created this complete end-to-end solution. To the banks’ claim to have discovered the process before him, according to Mr. Ballard, is patently ridiculous.

Democratic Senator Dick Durbin of Illinois is fighting a private and public war against banking institutions for establishing high monthly debit and checking fees, specifically against Bank of America.

What he would like people to know is that free checking is actually expensive checking, and that the fees involved with receiving them are often tucked away somewhere else where it’s harder to catch them. The question is also potentially philosophical in nature, as an analyst from the Aite Group, Ron Shelvin postulates that it can be argued that free checking will always exist just as easily as that it never actually existed in the first place.

Why the confusion?

Free checking is a service and if we assume that no company or institution, which includes banks, can afford to offer its customers a purely free service we understand that the funds must originate somewhere in order to provide something. For example, in the past free checking was achieved by hidden fees, such as overdraft fees. While it’s true that overdraft protection is in-and-of-itself a service, overdraft fees are high (and occur relatively frequently) enough to compensate for free checking. Customers are also feed for using A.T.M.’s belonging to other banks. Another source of funds that purportedly covers free checking is overpriced debit cards fees, which either together or separately allows for it.

Durbin wanted legislation to be passed that would restrict high checking fees. When Bank of America enforced a $5 monthly debit card fee, he suggested that people should leave that bank.

And other financial players are trying to capitalize on some banks’ high checking fees, such as a company called PerkStreet, which returns customers up to 2 percent for making purchases with their proprietary debit cards.

And another company, BancVue, offers checking that can bring a return an interest rate higher than 3 percent for regular card users. The company claims that the total amount of branches that offer the BancVue return will equal the revenue generated by the 10th-largest bank in America.

And so Senator Durbin’s point of contention, and his legislative push, is that banks with more than $10 billion in assets will not be legally permitted to both charge the high monthly fee and impose a collection fee on debit cards. If passed, his legislation will exclude institutions with lower assets, because the revenue generated by their fees are invested in creating better checking account opportunities.

A rather strange problem is taking center stage in the banking industry today; there is too much money in the banks. For example, money in the bank is typically a good thing, but only to a degree. Banks generate revenue by investing customer deposits into other areas, such as lending, home purchases, expansion plans or using it to finance new businesses. With scores of customers growing increasingly anxious about safeguarding their money, more and more are using banks as giant piggy banks where they can store money inevitably in a stable environment. In other words, money is sitting in banks without letting them invest it in other sources, which in turn doesn’t stimulate the economy.

Consider that Wells Fargo allocated approximately $8.2 billion in deposits to finance new loans out of the nearly $41.8 billion accumulated in the third quarter.

Bank owners are turning to creative methods in an attempt to detract customers from storing money in their banks. For example, some known banking names, such as Wells Fargo and JPMorgan Chase, are transferring a fraction of the federal deposit insurance charge to some of their small business clientele with the hopes of, kindly, letting them take their business elsewhere. Earlier this year, Bank of New York Mellon notified customers of a new fee of 0.13 percentage points of some of the clients using the banks as cash storage centers. While banks are not typically keen on turning away customers from standard banking processes such as bank deposits, their goal is to get things back on track with as indirectly as possible and avoiding a slap on the wrist, even a weak one.

Generally speaking, this is largely unheard of, especially for community banks grappling with the large influx of money that has created a surplus within their safes and vaults. According to Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LLP, "The bottom line is that it hurts your margin if you get a lot of deposits and have nowhere to put them. The margin is the one thing banks are used to controlling, so it requires behavior modification to tone down an appetite for deposits." Hyde Park Savings Bank, a community lender in the Boston area, reduced its customer base of C.D. holders from 35,000 to approximately 1,000, encouraging customers with a checking or savings account to stay on board.

Data suggests that this set of changes has been affecting banks for the last two years, over which the average loan-to-deposit ratio dropped from above 105 percent to 94.1 for the 15 leading banks by the middle of 2010. In short, banks have been lending money more than customers have been depositing it. So rather than banks floating a loan, customers continue to float alone.