Could Financial Crisis Lead To Cheaper, More Efficient, Virtual Banking?

(MoneyWatch)  The recent announcement by Bank of America and JPMorgan Chase that they will change their policies on overdraft fees has me thinking about what other kinds of changes to the U.S. banking system might come about in the aftermath of this year's bankruptcy bloodbath.

(Wednesday, BofA said that it won't charge customers fees for overdrawn accounts of $10 or less, and JPM won't charge customers who go less than $5 overdrawn).

It's a well-known fact across the world that the American banking system is the most antiquated there is of any developed country.

The use of checks alone is enough to raise eyebrows among most Europeans and Asians, whom are more accustomed to regularly making cheap wire transfers or setting up payment plans which automatically claw the money out of bank accounts on a fixed date, free-of-charge.

It's also true that U.S. financial firms earn outsize fees incurred in the general inefficiency of their banking system, however. For example, in the U.K. a domestic wire transfer happens instantaneously between accounts, and is free of charge (that's the case for most of Europe, too). In the U.S., the process can take up to 3 days (meaning the money is stored on a clearing account to accrue interest for the bank) and costs between $20 and $40.

Bank overdraft protection fees are around $10 to $38, depending on a customer's plan. The collective value of millions of those fees alone amounted to $1.97 billion in revenue for big banks in 2006, according to a study recently conducted by the Federal Deposit Insurance Corporation (FDIC).

In light of the circus act forming around the BofA-JPM overdraft charges then, it's possible that small banks may begin to offer some kind of standard, across-the-board elimination of all these types of hefty fees in order to gain market share. They would of course lose the billions in revenue created by the fees, but in return, it would be much easier to appeal to a whole range of customers from different income classes, who just hate paying their bank to do simple everyday jobs.

The best way to do that profitably would be to shutter most branches and go pretty much entirely online. After a wave of forced branch closures this year, many small banks might find that the most logical solution is to do just that, if they are serious about giving the "big two" a run for their money.

Regardless, both BofA and JPM can expect continued scrutiny of their commercial banking operations now that they have gobbled up a massive piece of what used to be regional banking market share. In that way, getting too big to fail might, over the long term, turn out to be a hindrance rather than a help.