Banking Has Become an Oligopoly Instead of a Competitive Business -- And That's Really Bad News for Us 99%

Some folks have responded to Bank of America's announcement of a new $5 per month fee on debit cards with a glib, "If you don't like it, just pick another bank. It's a free market, baby!" They say that competition will punish BofA for its evil ways.

Sounds easy enough. Except for one small problem.

Banking is not really a competitive industry. In reality, it's more like an oligopoly -- a scenario in which an industry is controlled by a small number of firms. An oligopoly is a lot like a monopoly, where one firm controls the whole show. Only in an oligopoly, you have two or more firms calling the shots, and they love to do things contrary to the notion of a free market, like, say, colluding to raise prices. There are a few common signs that tell you when competition has left the building in a given industry. See if any of these look familiar.

Concentration of Power

The last time big banks blew up the economy, causing the Great Depression, they got broken up. Tight regulation protected small banks, so they could get in on the action. But a massive trend of consolidation in the industry starting in the mid-'80s shrank the total number of banks in the United States as bigger banks gobbled up little ones. Result? The biggest banks control a larger and larger share of deposits.

Concentration of deposits is one measure -- perhaps the best measure -- of competition in the banking industry. The number of depository organizations in the U.S. fell from 15,416 in 1984 to 8,191 in 2001, a drop of 46.9 percent. The share of deposits held by the biggest five banks swelled to 23 percent in 2001 from just 9 percent in 1984. Sound like a competition-driving trend to you?

If you think 23 percent is a big piece of the pie, consider this: In June 2008, before the Lehman collapse, the share of deposits held by the five biggest banks had soared to 37 percent. And the figure has only risen since then. By 2009, the top five banks (Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and PNC) boasted nearly 40 percent of all deposits. They got all these deposits not because they did a great job and offered amazing service (BofA is notorious for low rates on deposits), but because they ate up smaller banks. That's how I, once a customer of Marine Midland Bank, became a customer of the megabank HSBC.

This increasing concentration of deposits suggests that banks have been getting steadily less competitive over the last 30 years. Which allows nasty things to happen.

For example, when Bank of America decided to charge customers for using a debit card, an activity that actually saves them money on processing checks, they performed a maneuver common in oligopolies, known as "price leadership." In this form of tacit collusion, the lead dog in the industry announces a price increase, signaling to the other big dogs that it's cool for them to do the same. In this case, if the other dogs don't place fees on debit cards, they'll find another way to get the dough so that they keep pace with the leader. In the last couple of weeks -- as though by an invisible hand -- you may have received a letter from your bank noting some "changes." Maybe there's a new fee for using your line of credit account. Maybe your checking account is no longer free. Or maybe your bank will charge more for using ATMs. These "changes" mean only one thing: price hikes.

Cost v. Returns

Another telltale feature of oligopolies is a yawning gap between the cost of performing a service or making a product and how much a firm charges for it and gets to profit by it.

Jamie Dimon of JP Morgan Chase warned us that if regulators tried to prevent the banks from charging certain kinds of fees, they would find the money elsewhere, just like a restaurant might charge more for the burger if it can't charge for the soda. To follow the logic of Dimon's restaurant analogy, if you don't like how much a restaurant is charging for the burger, you just cruise down to the diner around the block. Problem solved.