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Preet Banerjee

Yes, you can tweak those banking fees Add to ...

Recently a number of banks have either raised account fees or increased minimum balances required to qualify for lower fees. If yours has done so, there's no need to get angry; as a friend of mine likes to quip, you can just "vote with your wallet."

There are a few reasons for the fee increases. Inflation is certainly a factor as the cost to build, maintain and staff traditional bricks-and-mortar branches goes up over time. Also, consider that the traditional model of savings and lending produces profits partly from the difference at which a bank charges interest on loans versus what interest rate it pays on deposits. This differential is known as "the spread." When interest rates are low, as they have been for some time, the profit from the spread is reduced, so one way to increase revenues is to increase fees.

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According to the Canadian Bankers Association website, almost 60 per cent of Canadians pay more than $10/month on service fees. That means more than $120/year and, of course, some people pay significantly more than that. In fact, some clients with private-banking packages can pay monthly what the average person pays in a year.

Whenever we talk about fees, we have to look at the other side of the equation. What do you get for them? It might sound crazy to pay $1,000 or more a year for private banking, a service offered by major banks to clients with big estates, but not if the client is using all the features available. Some packages include concierge services; one private banker told me they'd gone so far as to pick up dry cleaning and even babysit kids in an emergency.

This is an extreme example, but it's certainly true that we often leave things on the table when it comes to services and products we buy. We might pay for 500 channels of TV, really only want six of them, and maybe channel surf another 10 when we're bored.

With banking packages, it's important to ensure you have the right one. If you pay $15/month and you get 100 transactions, do you use them? If you only exceed your transaction limit one month per year, perhaps you are better off with a cheaper package and paying an overage fee once instead of using and paying more than 11 times per year.

There are various packages available at most banks; make sure to ask about the cheapest service to suit your needs as they may not volunteer the information.

If you really want to vote with your wallet, you could also consider a no-fee bank account. I use a no-fee savings and no-fee chequing account with an online bank, and have the barest-bones banking package with a traditional bricks-and-mortar bank for convenience to tie into my other financial products. It's a marginally more complex vote than one normally makes, but worth hundreds of dollars a year to my wallet.



FEES OVER A LIFETIME

Traditional bank account

$11/month (from age 18 to 65), assuming 2.5 per cent inflation = $11,993.46 in account fees

0.5 per cent interest paid on average balance of $1,000 (adjusted for inflation) = $454.30 in interest earned

ONLINE BANK ACCOUNT

$0/month = $0 in account fees

1.5 per cent interest paid on average balance of $1,000 = $1,362.89 in interest earned

If you were able to take the monthly fee savings, and add in the extra interest earned for an online account versus a traditional account, and invest annually into an investment portfolio that returned 5 per cent a year, you would have more than $40,000.

This represents the total opportunity cost, which you must compare against the level of service/convenience between offerings, to see what is right for you.





Preet Banerjee, B.Sc, FMA, DMS, FCSI is a W Network Money Expert and blogs at wheredoesallmymoneygo.com. You can also follow him on twitter at @PreetBanerjee.

Follow on Twitter: @preetbanerjee

 

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