Experts divided on
modernization's impact on costs
By Holden Lewis • Bankrate.com

Under banking reform, will you pay more or less in ATM fees, checking-account surcharges, credit-card interest and insurance premiums? The answer might depend on how wealthy you are.

"What is going to happen is that the current proposals will result in the poorest people having to pay the most amount of money for banking services and insurance," says John Taylor, president of the National Community Reinvestment Coalition.

As banks, insurance companies and investment banks merge, they'll pursue rich customers and slough off customers who aren't so profitable, Taylor predicts, adding that he expects greater numbers of poor people to opt out of the regular banking system altogether and instead use check-cashing outlets and pawn shops for their banking needs.

U.S. Sen. Phil Gramm, R-Texas, chairman of the banking committee, argues that the proposal would do just the opposite -- that it "will expand financial services and lower their costs for all Americans."

Looking at the numbers
How do you make sense of this? First, you can look at some statistics: according to the Federal Deposit Insurance Corp., bank fees skyrocketed while the number of banks shrank from 1988 to 1998. Meanwhile, there was a modest increase in interest income from domestic loans.

"Bigger banks mean bigger fees," says Edmund Mierzwinski, consumer program director for the U.S. Public Interest Research Group. "These mergers will result in less consumer choice and less competition -- that means higher fees for consumers."

Differing views
Martin Mayer, a guest scholar at The Brookings Institution, a centrist think tank, wrote in 1998 that bank mergers "will make it possible for banks to give consumers better prices because their costs will be lower, but they will also lessen the competition without which such savings are unlikely."

Mayer's conclusion: that "government can impose a higher level of disclosure and honesty than we are likely to get from the participants unpoliced."

But Chong Ng, vice president for global strategy and marketing for EDS Financial Industry Group, is much more optimistic. Individuals, not banks, will increasingly hold the reins, he believes, because of globalization and technology.

"If digital commerce truly takes off, banks everywhere will be operating globally," he says. "Instead of applying for a mortgage at the bank's interest rate, individuals will be able to advertise over the Internet that they want to borrow a certain amount of money at a maximum interest rate, then choose from various respondents."

-- Posted: Oct. 15, 1999