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.