That late 20th Century disease, merger mania, has been infecting banks at a feverish pace in 1995. This year’s $42 billion in bank mergers and acquisitions already makes it the biggest year ever. Last summer alone, Chemical and Chase Manhattan, First Chicago and NBD, NationsBank and Bank South, and First Union and First Fidelity all succumbed to the urge to merge.
Behind the trend: the easing of laws prohibiting interstate banking and the push by big banks to reduce their costs through efficiencies of scale.
If your bank hasn’t already been taken over, odds are that it will eat or be eaten in the next few years. The number of banks in the United States, already down from 14,417 in 1985 to 10,168 today, could fall another 50 percent by the end of the decade, according to the accounting and consulting firm Deloitte & Touche.
While the takeover binge may delight bank-stock investors, who have seen share prices rise 44 percent on average this year alone, bank customers have more to worry about.
On the plus side, a newly merged bank may offer expanded services, such as electronic banking, as well as more investment options. But the minuses tend to outweigh the pluses: higher service fees and lower savings rates for consumers, not only at merged banks but also at their competitors. If your bank is taken over, here’s what to expect:
– You probably won’t earn as much on your savings and you’ll pay more on your loans. Right after a merger, the new bank may actually offer better deals, such as free checking or voluptuous CD rates, to keep customers on board. But that honeymoon is usually over pretty quickly. In the long run, says Robert K. Heady, publisher of Bank Rate Monitor, consumers can get clobbered with lower CD rates and higher loan rates because of less competition.
That fear was borne out by a recent Bank Rate Monitor study in South Florida, where after 10 years of takeovers four big regional banks now control 70 percent of deposits. The average interest rate paid by those four banks on a one-year CD was recently 4.76 percent, versus the national average of 5.12 percent. Meanwhile, the rates the banks charged on unsecured personal loans averaged 16.7 percent, compared with a national average of 15.9 percent.
– You may get nicked with higher fees. Merger or no merger, consumers are getting socked with higher fees and charged for more services (such as human tellers) that once were free. According to a study by the U.S. Public Interest Research Group in Washington, D.C., most bank fees rose at twice the rate of inflation over the past two years. Consumer advocates predict mergers will push fees even higher, since large banks tend to charge higher fees and require bigger minimum balances than smaller ones.
For example, according to the latest Federal Reserve survey, fees on services such as stop-payment orders, bounced checks and money orders run 30 to 60 percent higher at large banks than at small ones. The study also found that out-of-state banks generally charge higher fees than in-state banks–something to bear in mind if your new bank hails from a far-off ZIP code.
– The federal deposit insurance on your account will remain in place–at least at the outset. FDIC insurance, which covers deposits of up to $100,000 if your bank fails, will move with your account to the new bank. If you maintained accounts at both banks involved in the merger and now have more than $100,000 in one bank as a result, your entire balance will be insured by the FDIC for a limited time. Savings accounts are insured for six months after a merger, and existing certificates of deposit are covered at least until they mature. After the grace period, however, you would need to move some of that money into accounts at other banks to stay within the insurance limits.
– Getting a business loan may be more difficult. Critics of bank mergers argue that larger banks concentrate their lending on more profitable segments, such as corporate loans, at the expense, for example, of loans to small businesses. Banks with out-of-state headquarters are also far less likely to lend money locally, according to a 1992 House Banking Committee study.
– Your existing loans won’t change, but your credit cards might. Your new bank can’t change your interest rate or any other terms on a mortgage, home-equity loan or car loan. But that protection doesn’t extend to your credit card. A new bank–or an old one, for that matter–can change the terms on your credit card as long as it gives you 15 days’ notice.
Even if your new bank doesn’t raise your rate, you may find your relationship souring in other ways. Big card issuers tend to be the least responsive to customers in terms of their willingness to correct errors or investigate complaints, says Ruth Susswein, executive director of Bankcard Holders of America in McLean, Va. So be ready to shop for a new card at another bank just in case.
– Mutual funds sold by your bank could sprout new loads. The current wave of bank mergers will soon be followed by a wave of bank fund mergers, since many of the banks involved in takeovers, including Chase Manhattan, Fleet Financial and First Union, manage and sell their own lines of mutual funds.
Fortunately, securities laws protect investors from some nasty fee increases, at least in the short term. Merging fund companies are prohibited from raising management fees for two years. But in some cases they can add sales charges, making new investments more expensive. For example, Fleet Financial and Shawmut Banks merged fund company will have a 3.75 percent front-end load on most of its funds even though Fleets funds until now have been no-loads.
– You’ll need to get new checks and a new ATM card. Banks have to standardize their systems and make sure customers from both the old and new bank don’t have duplicate account numbers. For that reason, it’s possible your account number will change. But banks will generally allow you to use your old checks for as long as a year.
The ATM card you get from the new bank may work in more machines without charge and also be part of more regional or national ATM networks. But watch out for new fees for using the card. If your new bank offers you an enhanced ATM card that can be used as a debit card as well, note that it may not be free the way your old card was. Annual fees typically range from $12 to $15.
