Maybe Bank Of America Has A Plan

Maybe — just maybe — Bank of America has a well-thought out plan behind its debit card fees.

Maybe it actually WANTS customers to leave.

Crazy talk, you say? Not sure about that. After all, ING Direct has been lauded for “firing” customers. Bank Technology News wrote this a while back:

“To promote customer homogeneity and keep costs down, ING Direct won’t hesitate to fire customers who demand too much. Better to win over customers with shrewd marketing and good rates wrought by the cost efficiencies of doing business online.”

So, rather than flat out telling unprofitable — or potentially unprofitable — to close out accounts, BofA figures, “hey, we’ll slap a fee on them, and if they don’t like it, they’ll leave. And if they stay, they become more profitable.”

And wouldn’t you know it, but Durbin opens his mouth, and HELPS BofA by telling those customers to “walk with their feet.” Talk about effective word-of-mouth marketing!

So what happens if 1 million customers leave BofA?

If they’re truly the least profitable customers, BofA’s average customer profitability increases. And with less unprofitable customers to serve, the bank can more easily shrink to a more manageable size.

But you know what else happens?

Unprofitable — or potentially unprofitable — go join credit unions or open accounts at community banks. The credit union folks think this is great because it probably means the average age of members goes down. Hooray!

But oddly, the credit union’s profitability is adversely affected. Because if it’s low balance accounts  walking in the door, the income accelerator — the revenue generated on deposits beyond the spread and fees — is diminished. (This by the way, is one of the key reasons why high-yield checking accounts are more profitable than no-interest accounts. See my report on Why High-Yield Checking Accounts Trump Free Checking).

Let’s look at a  scenario: Assume you have 100 customers, equally split across 4 segments. Assume that the average profitability per customer of segment 1 is $1, segment 2 is $2, segment 3 is $3, and segment 4 is $4.

You’re making $250 in profits with average customer profitability at $2.50/customer.

If, thanks to BofA, 25 new Segment 1 customers walk in the door, profits go up to $275, but average profitability declines by 12% to $2.20/customer.

If the four segments represent the generations, it’s possible that you will lose Segment 4 customers (Seniors) over time. So let’s say 25 new Segment 1 customers come in thanks to BofA, but 10 Segment 4 customers are no longer with you. Profitability still goes up, to $255. But average profitability declines to $2.13, a 15% drop.

And if the ratio of customers in the four segments doesn’t change — that is, if segment 1 customers don’t become as profitable as segment 2, 2 as profitable as 3, and 3 as profitable as 4 — over time, then your FI is in trouble.

Oh sure, you can hold hands and sing cumbaya and hope those customers become more profitable over time. But smart firms don’t do that.

———-

So maybe BofA’s plan is to drive out customers it doesn’t think are — or can be — profitable, and let some other FI deal with them.

I’m sure many credit union marketers are thinking that this is great, that they would love to have those relationships, and grow with them over time.

Maybe they can. But if the BofA rejects….oops, I mean defectors….are the younger, less affluent, Gen Yers, then it may take some time for them to have a material affect on the CU’s profitability.

I’ve heard CU cheerleaders talk about being more open to extending credit to younger and less affluent consumers, and finding ways to help those consumers manage their financial lives without the high rates and fees that the big banks charge.

But there’s a reason why those consumers either don’t get credit or have to pay higher rates and fees to get credit, loans, and accounts. They’re higher credit risks, and they bring less funds to the table, resulting in less profits.

Seems to me there are a number of people in credit union land ignoring those realities.

——–

But, back to BofA, maybe the imposition of fees on debit cards is a smart move for the bank. I wouldn’t have advised the bank to do what it did, instead, I would have told them to levy fees on writing checks.

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22 thoughts on “Maybe Bank Of America Has A Plan

  1. Ron, you make some very good points. I think most CU people are seeing this opportunity as an investment, at least I hope. I’m gonna bet that some of those more profitable BofA customers will defect too, just on principle. Time will tell tell though.

  2. I am one of those customers. I’m as low-maintenance as a depositor gets. A 25-year relationship, a healthy balance, all electronic and self-serve, no branch visits in 10 years. Are they sad to see me leave? I don’t get that impression.

    Who needs deposits anyway, right?

  3. Ken and JP: You both make great points. I’m certainly not implying that every customer that leaves is a low profit customer. I’m speculating, and stretching to come up with some reason –any reason — to try and explain why what BofA did was a good move. They’re bright people there — gotta give them the benefit of the doubt that they did some analysis and homework before pulling the trigger on this.

  4. Ron, I think you are on to something. In fact, I know you are. I wouldn’t say their “intent” was to drive them out, but I know that they did their homework, just like the other banks considering this same type of charge (unless their strategy guys can convince TPTB that relationship-based pricing is a better route than nickel-and-diming) and have come to conclusions in line with or very close to what you are postulating. You talk about PFM all the time, and show stats about how many banking relationships people have (what is it, like 3.4 on average? more?). It stands to reason that 2.4, or more, of those relationships are unprofitable to the bank, right?

  5. Ron,
    I had this exact conversation with someone yesterday, and I pretty much gave them the same reasons you did for B of A implementing this. The higher tier customers won’t be affected by this at all. These people mostly don’t pay fees on anything any way.

  6. They are a publicly traded company addicted to profits. When shareholders expect you to generate $XX billion in profit every quarter, you’ve got to find a way. WIth lending as weak as it is, the only way to make money right now is through fee income. I’m guessing BofA estimated the number of defections would be painful, but that even if they lose 20% of their customers, that would still leave them with 80% paying a $5 fee — $2.7 billion in annual income.

    Who knows? Things could be getting increasingly desperate around BofA. I agree BofA usually makes very smart moves, but maybe they are down to throwing darts?

    Keep in mind that news of the fee wasn’t formally announced by the bank, it was leaked prematurely to the press through an internal memo. BofA has been in crisis/repair mode ever since. They were ambushed. It’s very unusual to catch BofA off guard.

  7. Of course not. However, an account with $10,000 in it is potentially more profitable than an account with $1,000 in it if: 1) The bank does productive (i.e. revenue and profit generating) things with it, and 2) The account holder with $10,000 has more banking -related needs (i.e., CDs, investment accounts, etc.) than the $1,000 account holder.

  8. Good points, Ron and JP. I tend to believe this was a (mostly) calculated move by BofA for two reasons:

    1. Chase, Wells Fargo and others have been testing similar fees for a while now. That makes me think the fee income bump is probably worth their while whether customers leave or not. As JP suggests, though, the urgency might have been forced in BofA’s case.

    2. BofA needs to show profits. FIs have had plenty of time to brainstorm ways to make up lost interchange revenue, so it’s hard to believe there weren’t a handful of other ideas that got pushed aside in favor of this one.

    I suppose the thing I’m most interested in, though, is seeing what plans CUs, community banks, and other competition has to keep these newly acquired customers. Profitable or not, it’s a mistake to assume those relationships are automatically sticky. I suspect it won’t take too long before people start weighing whether $5/mo is worth the conveniences they’ve given up – especially if these other institutions start charging fees of their own (which history suggests is most likely inevitable).

  9. Tacit collusion? If every bank makes the same move at once, then what incentive is there to switch providers? Just like the airlines with bags. If every airline charges for checked bags, whatchya gonna do?

    I really don’t understand why BofA thought a new fee on debit card usage would be more palatable to customers than a broad “checking account fee” increase.

    I’m already paying a monthly maintenance fee. Tack on $60 per year for the debit card. That’s almost $200 a year… for something that had been free for most of my adult life. At one point, I even got *paid* by the bank, back when they offered $1 to make deposits at the ATM.

    A typical consumer — those paying foreign ATM fees and an couple overdrafts every year — could easily rack up nearly $500 in basic banking fees every year now. That’s something that they can’t afford, and it will command their attention.

  10. Let’s pretend this makes sense… Let’s pretend that a bank would willfully want to drive a million customers and billions in deposits away… Wouldn’t there be a smarter way to weed the account base if all you really wanted was account holders with $10,000?

  11. This is all a great example of how perceptions shape what we believe.

    I couldn’t even begin to count how many financial transactions my family makes each month. The ability to have my paycheck automatically deposited in my bank account seamless, reliably, correctly each month, and then make hundreds if not thousands of transactions off that account, and move money from other accounts into that account seamlessly and easily (while sitting naked eating Cheetos on my beanbag with my iPhone) is a miracle. For $5/month or $50/month.

    Meanwhile, I’m paying some stupid telco $100/month for the ability to call my wife from the supermarket to say “they’re out of 2%. you want me to get whole?”

    But…we’ve somehow been trained to think that we should get all those things for free or near free from our bank. So that when they raise the price, we go apeshit and accuse them of price gouging.

    Moving your account may very well be the best thing for you, JP. But I think a lot of other people are going to move their account, and find the grass isn’t greener on the other side.

    p.s. Yes, I know damn well that the mental image created w/ the beanbag comment will scar you for life. 🙂

  12. Ron, your explanation behind why BofA instituted the fee is spot on. Another thought, yet more of a quantipulation arguement…sorry, I know you hate these but If you’ve read enough of these articles in the media the consumers are all saying “if my bank instituted a fee like this I would either switch banks or stop using my debit card” , or “I would consider switching or just starting paying with cash”. In seeing comments like these it tells me the consumer has already given himself options. So, in addition to imposing the fee to hopefully rid of the unprofitable customers BofA may just be betting on the idea that Mr. customers will either just start using a CC or cash instead and never leave the institution; or just that yeah we customers say we’re going to leave but at the end I’m too lazy to switch and will just pay the $5 fee. “Betting on an idea” is not a strategy but, if I lost billions of revenue and my customer research suggest that customers have 3 options to either leave, use cash or CCard or stay in pay then I would impose some monthly fee too and bet on the come, e.g. very very small % will leave.

    Hope I made some sense in this…if not, then just throw me under the Quantipulation bus.
    Lee

  13. Not quite fair. I didn’t say I *expect* banking to be free. I’m saying that to go from “free” to “around $200” in the span of two years is extremely abrasive. I’m not an idiot. I understand how capitalism works. Inasmuch, I also understand that share price drives the largest chunk of a publicly-traded company’s decisions. Where you see “fair and reasonable fees for a complex service,” I see banks who can’t afford to surrender a nickel’s profit because shareholders expect them to be ever-increasing. Once a company demonstrates that a quarterly profit of $XX billion is possible, shareholders expect 105% of $XX next quarter. Earnings can *never* slip backwards. Weak lending + new regulations = increasingly desperate publicly-traded banks.

  14. My take on BofA, Chase, Wells Fargo and others is that they see this as a opportunbity to off load unprofitable customers. Its like refugees all trying to crowd into a little boat and the boat sinks. Credit unions have very small boats and may be slipping below the waterline unless they have a defensive strategy. Part of my strategy is NOT to allow big banks to off load unprofitable customers on my balance sheet. For that reason we have designed an introductory product that allows us to manage this issue. Those who are opening the doors and saying come on over, especially to the GenY segment may be flirting with disaster.

  15. For instance, roll out a new line of checking products for those who don’t match your ideal profile, telling those customers that Congressional changes to banking regulations require them choose a new account for 2012. “Unfortunately, due to these new regulations, we will be discontinuing the current checking product you have…”

    If the choice is to keep tacking fee after fee onto accounts vs. rolling out a whole new product line, I’d choose the latter.

  16. Lee: You made perfect sense (although I’m always looking for ways to throw ppl under the quantipulation bus). I’ve seen some of the surveys you allude to. I find it pretty near impossible that 83% of BofA customers will leave the bank. Thinking the number will be closer to 3 than 83. And I’m sure that getting folks to use credit cards is part of the bank’s strategy. But two things concern me there: 1) BofA made a big credit card push among its deposit customers a few years ago, and ended up with double digit default rates. Are things that much better now? 2) Durbin clearly has his site set for BofA, and his next predictable move will be to introduce legislation to reduce the credit card interchange rate.

  17. I’m choking on the notion that BofA just figured out some secret sauce to drive away only unprofitable customers. You guys can clap hands for BofA’s move if you like, talking about how Durbin’s aftermath can be spun into lemonade. I think this is a colossal f-up. I think BofA would have preferred to do nothing, and instead has made a huge mess for itself. Will BofA look back and say, “Aren’t we glad we did this?” Not likely. Especially not if you place any value on PR and WoM as brand-building tools.

  18. It seems that many banks & credit unions have consistently been in a race to the bottom in terms of fees & service rather than taking the risk of actually charging more (or anything at all) and providing premium services to those customers who are willing and able to pay.

    $5.00 per month is a trivial fee for the services that most banks provide on a typical checking account today. In contrast, millions of cardholders readily pay $50 to $500 per year annual fees to American Express for the ability to use the convenience of their credit services and I haven’t seen much outrage from AmEx customers. Perhaps BoA is seeking to attract/retain that type of customer who is willing to pay a fair price for a premium service?

    The outrage I’ve seen over BoA’s mere $5.00 per month fee suggests to me that financial institutions have done an excellent job of conditioning consumers to expect that the value of their deposit services is pretty much zero. That doesn’t seem like a long-term, healthy path for financial institutions to continue trudging down.

  19. Jason, that’s $5 per month on top of the monthly maintenance fees BofA added to its checking products. The account I had — that was free two years ago — now has a $12 monthly fee, plus the $5 monthly debit fee. That comes to $204 yearly.

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