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Banking Market Power

Many banks exercise substantial market power. You may deposit a check and then learn that it bounced. Although you had no idea that it wouldn't clear, the bank charges you an average of $4.75 to $7.50, with some banks charging $10 (large banks charge more than small ones). The person who wrote the bad check also pays an average of $15 to $19.50, with some banks charging up to $30. These prices are well in excess of the bank's cost of handling bad checks. According to the Bank Administration Institute, the bank's cost is $1.32. Most checks eventually clear -- the check writer merely miscalculated the balances in the account -- so the $1.32 is the bank's only cost. Even after including losses from fraud, the total cost comes to only about $2.70, according to a researcher for the Center for the Study of Responsive Law. Thus, the banks are exercising substantial market power.

SOURCE: Quinn, Jane Bryant, "Bank Customers Cry Foul Over Fees on Bounced Checks," San Francisco Chronicle, March 6, 1995:D6.

© 2003 Jeffrey M. Perloff. Reprinted by permission.

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