Jeff Gelles: Getting banking off the fee track

Want to strike a blow at the nation's overgrown financial sector - the folks who helped create the problem known as "too big to fail," fed the last decade's devastating housing bubble, and by 2006 were booking $3 or $4 out of every $10 in corporate profits?

You could head to the Occupy Wall Street demonstrations, or to Center City for the Philadelphia version. There are a lot of people to be angry at, and as others have noted, at least these demonstrators are aiming at some of the right targets: the financial institutions that brought the country to the brink of a new depression, and the hapless regulators and lawmakers of both parties who made it all possible by blind faith in self-correcting markets.

But here's something else you can do - especially if your anger was stoked by the news that Bank of America and other big banks are raising debit fees: You can vote with your wallet by switching to a smaller bank or credit union, or even to a larger bank that offers a better deal.

True, you won't be directly addressing larger issues such as joblessness or growing disparities in wealth. But you'll be helping indirectly - using free-market tools to counteract the free market's excesses - and meanwhile keeping more of your own cash.

Today I'll tell you about that opportunity at one such institution, six-year-old Valley Green Bank in Northwest Philadelphia. But there are others in the region and elsewhere that are also trying to return banking to its roots and away from its reliance on often-hidden fees.

Bank of America essentially blames its new $5-a-month debit-card fee on Congress and the Federal Reserve.

Last year's Dodd-Frank financial reforms required the Fed to limit the transaction fees banks can charge merchants for debit purchases to an amount "reasonable and proportional to the costs incurred by issuers" - a level the Fed ultimately decided was about half what the issuers were charging.

As of Oct. 1, large banks are governed by a formula the Fed says will generate an average of 24 cents per transaction, down from an average of 44 cents - a change likely to cost Bank of America, which processed 5.7 billion debit transactions in 2009, more than $1 billion a year.

In other words, Bank of America can't take as big a cut on your debit-card purchases by charging merchants what it did before. So it wants to make up the loss by charging you, its customer, instead.

It's important to recognize that the problem didn't begin with the "Durbin amendment," as the fee limits are known. It's rooted in banking's evolution since the 1980s, a period when regulatory oversight waned while technological and business innovation waxed.

Those trends are linked, of course - looser rules give innovators more latitude, and that's typically a good thing. But in the wake of the financial collapse, some lawmakers rightly thought it was time to reestablish a better balance.

Why did this market need closer oversight? Thanks to technology and growing dominance by Visa and MasterCard, the banks and network owners now essentially run a parallel, private monetary system. And dominating the system has enabled them to impose a tax.

If you write a $100 check to your neighborhood store, the store puts $100 into its account. But if you pay by Visa Check Card, the store has been paying about $1 or $2 to the bank. The charges vary, and seem similar to credit-card fees, but they aren't for credit risks - you're paying with funds from your own account. That's why merchant groups, which said consumers were ultimately paying the excess costs, finally won Congress' attention.

Debit fees were a good enough deal for banks that some lured customers with rewards programs. And they were a good enough deal that the Fed initially proposed limiting fees to about 12 cents per transaction, before the banks squawked and got the new caps doubled.

Above all, they fit perfectly into the bigger-is-better model of banking - the one that got us all into trouble.

What attracts consumers to the largest banks? Ironically, a key lure is averting fees - especially those imposed for using a competitor's ATM, and the surcharges the competing bank tacks on. They can easily cost $3 or $4 per transaction, costs you can avoid by using one of Bank of America's 18,000 ATMs.

In the last few years, some banks have countered that edge with a simple tactic: rebating a customer's costs for using an out-of-network ATM. That's part of what Valley Green Bank does to compete - depending on the account, customers get four or six free withdrawals a month at outside ATMs, and deposits elsewhere are always free.

But Jay R. Goldstein, Valley Green's CEO, says the bank's key insight is that traditional approaches are still viable when combined with creative use of technology.

For instance, Valley Green only has two ATMs. But commercial customers don't need to go anywhere at all to deposit checks - the bank provides them with scanners to convert checks to electronic form.

Before opening, Goldstein shopped competitors' offerings - and learned what not to do. "In some cases, there may have been 10 different options with different components and fee structures. My head was spinning," he says. "We wanted simplicity, and we felt that if you were a good customer, your checking account should be free."

Goldstein worries about the unintended consequences of new bank rules - a fair point as we struggle today with the unanticipated consequences of past action and inaction. And he feels for squeezed competitors scrambling to replace fees lost because of rules that don't directly affect smaller banks. But he says Valley Green won't suffer deeply even if its fees decline.

"Fee income represents less than 1 percent of our overall income," Goldstein says. "We believe that if we provide good, effective service, we'll make a fair interest rate on our loans and pay a fair rate on our deposits. And we'll make our profit on the difference."

It sounds so retro in 2011. But it's a back-to-the-future that I'd bet many consumers would embrace.