Michael Wolraich's picture

    The Trouble with Banks

    It's hard out there for a bank. Last year, retail banks lost a major revenue source when the government regulated overdraft charges. This year, they took another hit when the government capped the debit card fees. And amidst an anemic credit market, they're having trouble finding investment opportunities for their deposits.

    According to the New York Times' calculations, it costs the banks $200 to $300 a year to maintain a checking account, but they're only earning $85 and $115. So now they're scrambling to find new ways to charge customers, from conspicuous checking fees to sly little charges that sneak into bank statements.

    But hold on a minute. Why does it cost $200 to $300 to maintain a checking account, especially now that so much is done electronically? By way of explanation, the Times mentions only FDIC insurance premiums and the cost of staffing branches. But FDIC premiums are just over a dime per $100 of deposits. If a customer deposits $1,000, it costs the bank about a buck.

    Branch operating costs are more believable. Real estate and salaries are not cheap. For instance, I wandered into my own bank the other day--a spacious office in high-priced midtown Manhattan. As usual, there was no line for the teller. I counted eight employees in the building and only one other customer. You can't run a business that way unless the customers pay a lot of money.

    Well then, why not just close some branches? There are some 700 branch banks in Manhattan, more than ten times the number of post offices. Nationwide, there are almost 100,000, four times as many as existed in 1970 before we had ATMs or electronic banking. Who needs so many branches? Leave us customers a few ATMs, and on the rare occasion that we need a human teller, we'll go the extra distance to central branch.

    Only that's not how it works. See, those fancy branches all over town are not actually there for our convenience. Or rather, they are there for our convenience exactly once: when we sign up. After that, the bank never really wants to see us again, unless we sign up for additional products.

    Have you ever paid attention to the layout of your bank? The teller window and ATMs usually occupy a relatively small proportion of the space. The rest of the room is filled with the desks of various assistant branch managers, customer service agents, financial advisors, and so on. They are not there to serve you. They are there to sell you.

    That's why you rarely see an ATM owned by a major bank standing on its own. An ATM can serve you almost as well as a human teller, but it's not very good at selling you financial products.

    Yet the New York Times said that those financial products aren't profitable. So why would retail banks spend so much to sell consumers money-losing products?

    Because, of course, the products aren't money-losing. Retail banking has been extremely lucrative for a very long time. It has been so lucrative that banks have opened branch after branch at considerable expense in order to compete for customers. If consumer banking has suddenly become unprofitable, it is only because the reduced revenues no longer justify the immense sales and marketing infrastructure of the branch banks. And if the banks are now looking for new ways to charge customers, it is not because their business is truly unsustainable but because they are too accustomed to the huge margins that the sector formerly provided through hidden fees.

    The good news is that with a more transparent marketplace, the profit margins will remain moderate. As Bank of America in its hubris recently discovered when it attempted to overcharge account holders for debit cards, customers will simply take their business elsewhere. The cheaper banks without so many fancy branches--some without any branches at all--will happily take customers without the extra fees.

    It's only hard out there for a bank that can't kick the habit.



    The cheaper banks without so many fancy branches--some without any branches at all--will happily take customers without the extra fees.

    I belong to such a bank: USAA. Not only do they not charge me ATM fees, but they reimburse me for fees (up to $10/month) that other banks charge me for using their ATMs. I love USAA. If you can join them, you should. It used to be open only to military officers and their families (I'm an army brat), but it is now open to all members of the military and their families. I believe that change is retroactive, in that if you've ever served in the military, you can join USAA. Not only is their bank service incredible, but so is their insurance.

    One of my siblings uses USAA now, and I'm switching over at the end of the year.

    I have USAA as well. And also Citibank. So far, Citi hasn't charged me anything. If they do, I'll dump 'em.

    We should all leave the majors just to teach them who's running things - and we should do the same with the incumbents in congress as well.  Money only has value in politics if it can be used to buy our votes. 


    I love it when USAA addresses me as "Lieutenant". I mean, where can you get respect like that? "What can I do for you this morning, Lieutenant?" You just cannot buy that kind of respect anywhere today. I call USAA at least once a week. It's like when I was stationed in Yokosuka, Japan. The dental technicians on the naval base were really cute. I used to make an appointment every week, until the Admin office picked up on it and restricted my appointments to once a quarter.  About that time CINCPACFLEET's daughter arrived in Japan on a vacation from college......yes, I've been with USAA for a very long time.

    Hey, they call me "maggot!" I have to drop and give twenty for every withdrawal.

    They can look at my file and realize I aint gonna do twenty! I have all my stuff there and get a little frustrated with the phone option system. But what service!. Yesterday I updated my homeowners' coverage and did everything on the phone in about 10 minutes.

    This short essay is pretty damn interesting.

    I mean what is more boring than banking and yet what institutions are really as powerful as our banking institutions.

    And as you point out; how exactly should these 'costs' be broken down without being simply more propaganda fodder to suit these banking blaggarts?


    You almost have me interested enough to do some more reading on this elusive subject.


    Modern retail banks profit by creating American money and lending it to Americans at interest.  Now, first of all, if you can't figure out how to make money with that business model, then I would suggest retiring from finance.

    Second of all, this would seem to be an appropriate moment (or really any moment for the last three years) to question why this arrangement exists.  I have argued previously that the fundamental reason for doing this is because we believe in the positive outcomes of multiple private institutions competing in a market place.  However, we have seen some decidedly negative outcomes from these markets as of late.  Does it not behoove us then to ask whether the wisdom of the present arrangement still stands?

    Ultimately, America can and should regulate these institutions in any way we see fit.  No industry should be allowed the privilege of creating sovereign money and​ charging interest on it while the American people accept full responsibility for the losses created by those private institutions.  Three years later, that's still where we are.

    And I'm supposed to feel bad for giant retail banks because they can't make out like they did before their bubble burst?

    EDIT: To push the point just a bit more after re-reading this para:

    But hold on a minute. Why does it cost $200 to $300 to maintain a checking account, especially now that so much is done electronically? By way of explanation, the Times mentions only FDIC insurance premiums and the cost of staffing branches. But FDIC premiums are just over a dime per $100 of deposits. If a customer deposits $1,000, it costs the bank about a buck.

    So they receive a $1,000 deposit and pay $1 to insure it for the privilege of lending out $900 of that deposit at retail interest rates, with the American taxpayer promising to backstop all such insured deposits in the case of a bank run.  Again, I'm not sure how it's possible not to profit from this arrangement unless you're simply incapable of conducting due diligence in making loans.  Of course, when you don't have to worry about holding those loans, but can instead slice them up and sell them to the next sucker, well...

    Great analysis, Genghis.  I do all of my financial stuff through Chase.  Checking, savings, credit card.  I have no dealings with any other bank, and I like it that way because there's one place to go whenever there's a problem with something.  I rarely need to go to a branch but when I do, I am pretty much never helped at the teller window.  I might start there, but before long I'm sitting at some one's desk and being asked if I want coffee or water.

    "It's just that my credit card was declined this morning and I want to make sure it was the store's system and there's nothing wrong with it," I say.

    And the friendly Chase employee verified that my card is fine.

    So why am I sitting there?  With coffee?

    Oh, since I'm here, did I know that Chase offers another card that charges a slightly higher interest rate but offers more reward points.

    Oh, I don't want that.  I want to keep my low rate.

    Oh, okay.  Well, we just wanted you to know about it.

    Of course, a teller could have swiped the card and verified there was no problem in 2 seconds.  But then who's going to give me coffee, treat me like a big shot and persuade me to exchange my lower rate card for a higher rate card?

    Of course branches are profitable, just for the reasons you say.

    There is only one US bank - FDIC.  

    The others are parasites.  Okay, maybe some are symbiotes.  But without FDIC, how many of them would you entrust with your money?  Isn't that the primary function of a bank?

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