Of all the big US banks that managed to survive the global financial crisis, Bank of America and Citigroup were the two widely recognized to be at risk of failure in late 2008-early 2009. Sheila Bair, then head of the FDIC, really wanted to replace Citi’s CEO, Vikram Pandit, but settled for forcing the bank to do some pretty serious downsizing and streamlining. By contrast, Bank of America has not only been spared this sort of treatment (save being told it can’t pay dividends until its balance sheet is stronger) but it’s also the biggest beneficiary of the most recent “help the banks” full court press, namely, the mortgage settlement.
So how does Bank of America propose to shore up its equity base? Now that bank stocks have traded up smartly, it might be able to unload some more operations (it did a bit of that when it stock was under stress). But bankers prefer to run behemoths because executive pay is highly correlated with total asset size. And that means it’s a given that BofA has ruled out another way to improve its earnings: cutting manager and executive pay, as the Japanese banks did in their bubble aftermath.
Nah, the path of least resistance is to charge customers more. Readers may recall that BofA tried imposing a $5 a month fee on debit card users (there were some customers who generated enough profits for the bank, such as mortgage borrowers, who’d have the fee waived). That led to a big pushback in the media and from consumer groups, and the Charlotte bank had to drop that idea.
The Wall Street Journal reports on latest plan for preserving BoA’s imperial right to profit:
Bank of America Corp. is working on sweeping changes that would require many users of basic checking accounts to pay a monthly fee unless they agree to bank online, buy more products or maintain certain balances…
The search for new sources of income is especially pressing at Bank of America, where 2011 revenue dropped by $26.2 billion, or 22%, from its 2009 level.
Bank of America pilot programs in Arizona, Georgia and Massachusetts now are experimenting with charging $6 to $9 a month for an “Essentials” account. Other account options being tested in those states carry monthly charges of $9, $12, $15 and $25 but give customers opportunities to avoid the payments by maintaining minimum balances, using a credit card or taking a mortgage with Bank of America, according to a memo distributed to employees.
On the one hand, banks aren’t charities. And we have predicted that more costly retail banking was in store as a result of the deleveraging of consumer balance sheets, and some of the worst practices being curtailed, such as cross default and double cycle billing on credit cards.
But on the other hand, it’s disingenuous for banks to pretend that they should have the latitude that true private businesses have. Banks receive subsidies from the state well beyond those enjoyed by any other nominally private business, including defense contractors. Banks have admittedly always had a fair number of unprofitable checking account customers, as the article points out:
Banks often lose money on accounts like basic checking that they use in part to lure younger customers. They offer the accounts in part because they hope to retain customers as they grow more affluent and use services such as mortgage and business loans and credit cards.
Bank of America has presumably woken up to the trend noted in some of Matt Stoller’s and our posts: that young people, burdened by high levels of student debt, aren’t buying real estate at anything remotely resembling historical levels in relationship to household formation. And ex finance, even those young people who are employed are less likely to be upwardly mobile than past generations. It might have helped if the banks had thought that through before they crashed the global economy.
And the current unattractiveness of small customers is in no small measure due to ZIRP. Why do you need free customer balances when market liquidity is high? But one of the important social functions that banks provide is payment services, and those in turn depend on the fact that banks settle their net exposures with each other on Fedwire. Yet this fundamental service is the one that Bank of America is proposing to make more costly.
For many customers, the sort of changes that BofA is implementing would just be a nuisance. Some will close Bank of America accounts and move to another player, perhaps a smaller one or a community bank. Some will change their habits and product use so as to make them more attractive to BoA, relying less in the way of branch services and doing more online, making greater use of BofA credit cards.
The open question is to what degree other banks will replicate Bank of America’s moves. As with the $5 debit card fee, it hoped to be a price leader, but that plan backfired. Other banks are similarly eager to boost flagging margins. The competitors are sending mixed messages:
J.P. Morgan consumer banking chief Todd Maclin told investors Tuesday the bank would like to be able to charge more than its current average of $10 to $12 a month, but “in this environment I am not going to rock that boat.”…
J.P. Morgan Chase and Wells introduced new account structures in 2010 and 2011 that imposed monthly maintenance fees unless customers maintained certain minimum balances or hit preset monthly deposit levels. J.P. Morgan said Tuesday that 70% of customers with less than $100,000 in deposits will become unprofitable for the bank because of new regulations, such as caps on overdraft fees.
I’m not terribly sympathetic with this profit analysis. A big cost in retail banking is the branch network. Has anyone missed the astonishing proliferation of bank branches? In my not-cheap neighborhood, they’ve displaced perennial high profit retailers like liquor stores as well as few Gaps and coffee shops. But it’s more convenient to blame Dodd Frank than admit their “trees will grow to the sky” assumptions were a tad rosy.
The bigger lie here is the one sold by the banks, that bigger banks are more efficient. In fact, every study of bank efficiency ever done in the US has found that bigger banks have HIGHER costs per dollar of assets once a certain size threshold is passed (and that is usually pretty low, between $1 and $5 billion in assets). That means there is no economic justification for mega banks, since smaller ones could do the job more cheaply. Oh, and the argument that mergers allow for cost savings? Bollocks. Each bank separately could have achieved any cost savings on their own.
Now banks have sold analysts and regulators on a different efficiency metric, that of an “efficiency ratio” of costs relative to revenues. Josh Rosner points out via e-mail that better looking efficiency ratios that big banks supported were not the result of operational prowess, but from cutting corners in areas like underwriting, servicing, and compliance.
But when the other banks do follow Bank of America’s lead (and I submit it’s when, not if), the implications will be more serious. There will be a tier of customer that won’t be willing or able to find a way to avoid paying monthly fees and will find them a burden. Think, for instance, of computer averse old people.
And in the upside-down world of finance, people who are unbanked face even higher fees. I was told of an open meeting held by Richard Cordray, the new head of the CFPB, in New York. Some of the consumers told of how costly it was if you could not afford to have a bank account (for instance, people who receive benefits on stored value cards). They incurred fees for merely checking balances and the charges for withdrawing cash were shockingly high. Stored value cards (the successor traveller’s checks) are handsomely profitable products even in the absence of these withdrawal/usage fees. You don’t need to price gouge to make good money on them. They’ve been used since the mid 1990s in South Africa to pay laborers who don’t have bank accounts (South Africa has a very high unbanked population). Needless to say, their transaction charges are considerably lower than those in the US (aside: one of the reasons is that the US is still using mag strip technology, which was out of date by world standards when I did an international credit card study in 1997. Chip cards allow merchants to charge transactions to a stored value card without calling for authorization, which reduced both phone charges and infrastructure needs).
Banking became an overly large proportion of the economy and the financiers don’t plan to give up their economic rents without a big fight. The only good news about bank efforts to charge ordinary customers more for basic banks services is it will pave the way for more smaller and more efficient new entrants.