Money Does Not Bring Happiness; So You Might As Well Deposit It In Your Bank

Embed from Getty Images

About 35 years ago, for about 20 months of my checkered career, I served as General Counsel to a $10 billion financial institution.  Among my proudest professional accomplishments is the fact that no one at the bank went to jail when the government seized it a few months after I left (except the CEO, who never listened to me).  So I fancy that I know a (very) little bit about bank economics and regulation.

Most banks make money by taking deposits into savings and checking accounts (known as liabilities, because they are obligated to pay back the depositors) and lending or investing the funds they take in at higher interest rates than they are obligated to pay (these loans and investments known as assets, because they produce revenue).  Most financial institutions match the amounts and durations of their liabilities and assets, to make sure there is always a positive differential (spread) between the rates they pay and the rates they receive.

The banks augment their revenue with user fees and expend resources providing services to customers.

I had occasion to remember my banking experience when I wandered into my local branch to pick up a new credit card.  This bank followed the Israeli model of bank finance, known affectionately as “soaking your customers (otherwise known as ‘freiers’) while providing no or minimal services.”  At the branch, there appeared to be about nine bank officers, seven of them working in splendid cubicle isolation at computers and avoiding eye contact with almost supernatural skill, and two tellers, one or another of whom was always out of sight in the back room because, apparently, there was no task that could actually be accomplished at the window.  There were also at least 17 customers, each clutching the number taken from a dispenser, as at a popular bakery (the red digital indicator was at 21 and I had number 38).

Six semi-comfortable chairs were provided, with the result that the bank lobby looked like a bus station, with people walking around muttering, “Do I have to wait in line just to pick up a credit card?” (That was me.)

With such abysmal attention to customer service, how could the bank possibly make money?

Here’s how:  there is a monthly charge for the credit card, whether or not it is used.  (Of course, it is not actually a credit card, since the bank does not extend credit, instead paying the charges with the customer’s deposited funds.)  There also may be some or all of the following fees: for using the ATM to access your money; for wiring money into your account; or out of your account; for a teller transaction; for an on-line transaction.  If you have a “credit” card, under certain circumstances, the bank takes a chunk of your money and holds it as collateral for funds you may charge–but have not yet charged and may never charge–so while it is your money, you have no access to it; the bank does.  The bank may charge for deposits, withdrawals, and transfers.  With respect to transfers from outside the country, the bank charges a fee to receive the wire and a fee to convert the funds to shekels, using a conversion rate that would embarrass the street guys in the black hats.  Just in case all of the individual fees prove to be insufficient, or you don’t engage in any transactions, the bank charges a monthly maintenance fee for the privilege of letting them hold and invest your money for profit.  Here’s one for you to chew on:  a credit to your account made through an automatic  payment app and requiring no human involvement may be counted as a customer-executed transaction.

Ka-ching!

And, of course, as I had just learned, you may need to travel to the branch to pick up your bank credit card; I do not know if receiving your card qualifies as a teller transaction for which you are charged.  Why not?  After all, if they had the card delivered, you might think that they have some regard for your convenience.  That would be a mistake.  They probably even think they are doing you a favor by delivering the card directly to your sweaty hands.  In the US, by law, the cardholder is not responsible for fraudulent or unauthorized use; one simply contests the charge and it is reversed, with the card issuer or merchant bearing the risk.  In Israel, it would seem that there is no efficient way to avoid liability for any charge made on your card.

If you are a freier who can’t protect your account, it’s probably your problem.

And now that I think about it, no way they didn’t charge me a transaction charge for handing me my card, because the service was exemplary, worth every shekel.  When my number finally flashed (it was like winning the lottery), I received a helpful description of the new expiration date from the cheerful bank teller. “Your card will be in effect until October 2031.”  “October 2031, just as it says on the card?”  “Yes; 2031.”  “Thank you so much.”  You really can’t place a value on that kind of personal service.  As the MasterCard people say: ”Priceless.”  Or as the Israeli banks say: “For just a small transaction fee.”

Guess what?  Israeli banks rank among those with the highest fee revenue in the world.

Of course, such a lucrative business will attract competitors and competition will drive down prices.  Right?

Wrong.  There are five major banks and they all charge the same rates, give or take a little.  And they all make a lot of money.  This is despite efforts over the past twenty years by the Bank of Israel to control costs charged to customers.  Yes, the status quo is the result of twenty years of “reform.”  How do you spell “failure?”

To be fair, there have been some salutary changes involving portability of accounts and bundled services, but after standing on a bum knee for 32 minutes waiting for a stinking debit card, I am in no mood to be fair.  Sorry, banks.

When banks outside Israel want to increase their liabilities (so they can better attract depositor funds to invest at favorable rates), they offer such things as unlimited free checking, no-fee credit cards (which arrive in the mail and must, for security, be activated by the holder), higher interest rates on deposits, waived ATM charges, and convenient free app-based banking.  You know, customer service stuff.  You guessed it.  Banks inside Israel think that banks outside Israel are freiers.

But, you ask, perhaps Israeli banks operate on such thin margins that they need to nickel and dime their customers just to stay afloat.  Right?

Nope.

Six of the top ten listed Israeli companies on the Tel Aviv Stock Exchange are banks.  Bank Leumi, the most profitable publicly traded company in the country, had record profits in 2024 of almost 10 billion shekels.  Bank Hapoalim earned more than 7.5 billion shekels.  First International Bank and Mizrachi Tefachot had returns on equity that exceeded those of Leumi and Hapoalim.

But, you ask, as interest rates have risen, the interest rates paid to depositors must have kept pace.  Right?

Wrong.

The banks have quickly ratcheted lending rates up, while maintaining relatively low rates on deposits.  The average retail rate on loans approximates 9.2%.  The average rate on most fixed term deposits is 4% or less.  That’s quite a spread.

And they might be charging you a monthly maintenance fee for the privilege of allowing them to hold and invest your money.

Here’s what you can do about it.

Not much.

Unless–and this is really going to fry your knickers–you are rich.  People with lots of money, who could actually afford to pay all these fees, are apparently able to negotiate lots of them away. It seems that the banks really don’t want to rip you off unless you can ill afford it.  As Mark Twain said, “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

You can shop around.  Even threatening to leave might yield some marginal results.

On the larger front, the issue is not just the cozy regulatory climate that you might expect.  Of course, some of The Bank of Israel’s most senior officials have extensive ties to the Israeli banking sector.  But other regulators come from academic, government, or legal institutions, because the Bank of Israel values expertise in economics, finance, and law.

It might not be such a terrible idea to include lots of consumers on policy-setting committees.  Except that most of them are working second jobs so they can pay their bank fees.