Sep 3 2010

Did Financial Reform Do More Harm Than Good?

Posted by Simon Zhen in Banking, News
0 Comments

The financial industry was a different beast twelve months ago. This time has shed some light on the toxic relationship between three key parties: the government, financial institutions and consumers.

Punch in the face Thinking of the times before the economy fell, we were able to get a credit card easily and most people didn’t have too much trouble obtaining a mortgage for their home purchases. Lenders were lenient and credit was readily accessible. Such was the alleged reason for the credit crunch and subsequent recession.

While I believe big banks were at fault for bring down the global economy, the government’s attempt to stick up for consumers by reprimanding the financial industry will eventually come back around to bite us in the rear – which will trigger another government intervention, thus repeating the cycle.

The Death Spiral Begins Continues
The media and financial experts predicted this a long time ago – that banks will try to replace lost revenues by implementing or changing their financial products and services.

It’s a natural response that is exhibited by all life on Earth. When you destroy a garden of beautiful flowers that used to be the feeding ground for bees, they’ll move to another garden. If you lost your job, you’ll look to replace that lost income by searching for another source of income. If a “fat cat” banker can’t charge you for “this”, they’ll charge you for “that”.

With financial reform, these were some bank revenue sources that suffered:

The group under the age of 21. This is a severe blow to the college student market for card companies.
Penalty fees. Overdraft, late, and over-the-limit fees were reduced with restrictions. No more multiple penalties for a repeated violation.
Interest charges. To reduce lending risk, banks cut credit lines and close accounts while new laws forced them to drop APRs if customers paid on time for 6 months straight. Also, potential borrowers weren’t able to meet their lending criteria.

Here are some of ways that banks have negatively influenced us since:

Increased APRs. Around the end of last year, many cardholders saw their APRs jump for no apparent reason (even those who paid in full every month). This could be due to the new rules that card companies have to cut interest rates on good payment behavior.
Reduced credit limits. Just like with APRs, credit limits were being slashed with no explanation and many took hits on their credit score. Banks were cutting their risk by reducing their extension of credit.
Inactive accounts were closed. To them, inactive credit card users are the top echelon of deadbeats (those who are lose money to banks). Credit scores took a dive for those with large credit lines and long histories.
Reduced rewards. There were some pretty amazing rewards and cashback credit cards out there before the economic downturn. Now, the rewards programs are abysmal. I curse the geniuses who came up with rotating categories.
Card conversions. Some cardholders are seeing their accounts being converted to different cards with different perks and programs such a no pre-set spending limit card.
Non-free checking. As of late, the sizzling news is that free checking may soon become extinct. We may see the days when we are nickel-and-dimed for simple things such as talking to a teller or receiving a paper statement.

So the game we are playing goes like this:

Banks want to make money and impose industry practices to bring about a profit.
Consumers suffer and grow increasingly unsatisfied by these practices.
The government steps in to defend the consumers by imposing new rules on banks.
Banks want to make money and create new industry practices to bring about a profit.
Consumers suffer some more and become more unhappy with banks.

Hurting Many to Help a Few
It feels as if financial reform has caused banks to cut the harm they do to the irresponsible customers and transfer their financial burden onto the entire customer base. It’s similar to one of those situations where one person arrives late to basketball practice but those who were on time had to run 5 laps while that one person watched.

Sure, we can’t blame those who had to undergo foreclosure and bankruptcy due to unfortunate events that were out of their control. But, I do think put quite a tight leash around the necks of banks. The majority of you (I hope) are handling your personal finances responsibly. Yet, you may find that your bank accounts and credit card accounts are becoming less and less attractive.

Are these effects sinking in for you yet? Do you feel financial reform has done good for the consumer population?

(Photo credit: Daniel Morris)