New Banking Legislation and the Consumer
Congress passed legislation that overhauled the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act in 1999. What will this mean for the consumer? Opinions vary but here are the facts and some views about bank reform that may help you to understand the possible consequences.
During the Great Depression, the Glass-Steagall Act was passed as a protective measure against the kind of speculative frenzy that helped produce the 1929 stock market crash. In the last two decades, the banking industry has seen much consolidation in an effort to gain a bigger piece of the financial-services pie. Until now, however, brokerage and banking industries have remained infusible. Some brokerage services have offered check writing and credit cards tied to money-market accounts made possible by loopholes in the law. Loopholes have also allowed many banks to offer customers fee-based life insurance policies underwritten by separate insurance companies. In many cases the new legislation will make legal what financial institutions have already been doing using the loopholes in existing laws.
The banks and brokerages see this as an opportunity to offer the convenience of one-stop shopping for the consumer. This provides for one company to offer a bank account, retirement savings, credit cards, home mortgage, auto loan and insurance, all on one monthly statement. What's more, all transactions can be handled on the Internet.
Analysts say that this could fuel a wave of mergers in the industry as companies compete to build financial supermarkets offering all the services customers need under one roof. Some say that this, combined with computer technology, will open the door for future innovation and products and services that have not even been imagined.
Pros and Cons
The real question for consumers is what influence this will have on rates and fees. The proponents say that rates will be lowered as customers are persuaded to get their auto loans and insurance from the same company if they received a discount. The same could be said for a mortgage and home-owner's insurance. Banks could attract customers by combining credit cards, checking accounts and mutual funds in a single account where excess funds are always invested, outstanding debt would be eliminated and cash would always be readily available.
Mega-mergers are certain. Supporters say that this will provide the consumer greater choices, convenience and that competition will be spurred leading to lower prices.
Opponents of the new financial modernization law say that there will be fewer competitors and the outcome will be higher fees and commissions. They also believe that rights of privacy will be violated. Fear exists that companies engaging in a broad range of financial services will be able to check bank records before granting health insurance. The bill requires financial firms to disclose their policies on collecting, using and protecting customer information. Consumers would be allowed to tell institutions not to give their personal data to some third parties, but no restrictions would be placed on sharing information among affiliates.
Consumers may also feel the sting of a shift towards fee-based income for these institutions. Interest-based income puts the financial-services company at risk. Now, the risk will be shifted to the consumer, as the banks will charge more transaction fees where there is no risk. Fewer competitors means that the institutions will all be able to raise fees together.
Another concern of opponents to the new financial legislation is that the bill encourages the concentration of financial power in a few hands. If any one of these fail, the banking system could fail and a government bailout would be forced. The mega-mergers are already happening, as we can see with the merger of the nation's second largest bank, Citigroup, and insurance giant Travelers, has already been blessed by federal regulators. Predictions are this will occur more with the possibility of, say, a Merrill-Lynch and Chase Manhatten Bank merger.
Insurance companies have lagged behind banks and brokerage companies and still rely on an inefficient distribution network of agents. Now, banks and brokerages will be able to buy insurance companies, eliminate agents, and begin selling insurance to their existing customers. The jury is still out on whether the reform will benefit or hurt the consumer. There will be major changes in the financial services sector in the coming years. We will have to wait to see who benefits the most.