The $31.6 Billion Blow To The Banking Industry

Includes: BAC, C, JPM, PNC, WFC
by: Matt Schilling

There's been plenty of negative sentiment brought on by recent news involving a majority the US based Big Banks, however the latest scrutiny by Washington and Consumer Financial Protection Bureau certainly deals institutions such as Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) a black eye.

The Consumer Financial Protection Bureau has initiated a review of these banks' marketing practices. This review will encompass not only the fee structure in place for overdrafts but the electronic and printed marketing materials and scripts read by service representatives. These scripts may in fact not fully disclose to the consumer what may or may not be included in an opt-in program directly related to the charge of overdraft fees.

These disclosures (or non-disclosures, if you will) will cost the average customer upwards of $350 a year. Bigger Banks such as BAC, JPM, WFC, Citigroup (NYSE:C), and PNC Financial Services Group (NYSE:PNC) charge consumers as much as $35 per occurrence on overdraft activity, without properly informing the customer that a) the have a negative balance and b) they have the ability to correct such a balance, if they so choose.

To the average consumer, the words "Overdraft Protection" mean just that. In other words, if I signed up for a checking account that included the ability to protect overdrafts and notify me in such a situation, I'd be all for it. However, to the banks, the words "Overdraft Protection" mean an angle at which they can charge the customer a fee based on the solution by the Bank, in an effort to avoid a larger fee placed on the individual's checking account. That sounds like I'm paying a fee to avoid a higher fee, and no matter what my checking account just went from free to about $12/transaction every time an overdraft occurs.

This news may not set off a single red flag. However, the $31.6 billion these banks generate annually from overdraft fees may take a significant blow. If the Consumer Financial Protection Bureau finds all nine of the current banks have improperly marketed such a product, fines and regulatory sanctions could very well hinder any growth in financial services over the next 12-24 months. The improper disclosure of fees by banks to consumers should bring back many memories of the 2008 mortgage fallout, affecting a majority of the above banks mentioned.

I continue to move my money out of banks because I believe they aren't as sound as they once were. Investors should pay very close attention to the financial condition and regulatory scrutiny these banks will continue to undergo in the next 12-24 months, and move their money into a fixed-income fund or high-yielding closed-end fund.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.