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Trying to stay off the "front page," Bank of America (BAC) nixes plans for new checking-account...

Trying to stay off the "front page," Bank of America (BAC) nixes plans for new checking-account fees set to ht about 10M customers by year's end. These customers - small balances, don't take out loans - cost the bank roughly $200/year. Back of envelope: That's $2B in losses vs. total income of $5.4B over the last 4 quarters. "Our strategy is to give our customers reasons to do more business with us," says co-COO David Darnell.
Comments (36)
  • My daughter has an account like that with BAC...there is no way they
    make any profit off of her....
    1 Dec 2012, 09:37 AM Reply Like
  • $200 per year, my eye. That is $17 per month, to do what ?
    1 Dec 2012, 10:26 AM Reply Like
  • I generally agree, blueice.

     

    I can't speak to this particular analysis, but several I have seen in the past have the hugely misleading flaw of amortizing ALL costs / capital across accounts rather than just truly incremental costs that are incurred for hosting any particular account.

     

    If they were REALLY losing $2B/year on these accounts, they'd be trying almost as hard to get rid of the accounts as to raise price on them. So that's what leads me to suspect this figure is either intentionally or inadvertently bogus, based on the same flaws that always seem to be incorporated into these "studies/analyses".
    1 Dec 2012, 11:09 AM Reply Like
  • Tricky, I do not trust The Bank of Barrock in the least..
    1 Dec 2012, 12:22 PM Reply Like
  • All banks have always done this for the reasons "The Shareholder" said, right below -- PR BS. "We're losing giant gobs of money on these accounts, we just HAVE to raise fees on them".
    1 Dec 2012, 12:31 PM Reply Like
  • It's good to tell it as it is. They think we're stupid, to swallow fibs like that. It doesn't take an idiot to figure out that it costs hardly anything to maintain small accounts on their computer systems and generate monthly statements that are mailed automatically to their customers. Cost of a stamp & envelope, electricity & ink, plus some labor to bulk-mail the monthly statement shouldn't cost more than $1 per month. A monthly account balance of $100 will more than earn enough returns to cover that cost. Most banks will designate Inactive accounts for more than 12 months as dormant accounts, i.e. no statements or updating will be done, so no fees charged until account is re-activated but the banks continue to earn returns on whatever balances in such dormant accounts.
    1 Dec 2012, 12:42 PM Reply Like
  • Yes, fully agreed.
    1 Dec 2012, 12:44 PM Reply Like
  • Right. How much do you pay for cable per month? Or maybe you're still stealing it? The banks are doing whatever they can to avoid being further demonized and attacked by the current administration. And remember that while politically correct Apple only employ 60K or so employees, each of the big banks employ something like 250K. People who spend $100 or more a month for that magical Isomething experience, supported by slave labor over at Foxconn, are usually the first to throw millions of bank employees under the bus.
    1 Dec 2012, 01:05 PM Reply Like
  • You should ask; " how many billions are the taxpayers paying each month to support the zombie banks?" With FED rates at .025% and 30-yr t-bills at 3%, the carry trade alone amounts to billions of annual profits in the banking sector. The banks should have been left to fail in 2008/09 instead of allowing the govt to bail them out.

     

    Re AAPL, I won't shed any tears when they slowly wither away into nothing. They should have been taking care of American workers buying their ICrap instead of supporting FoxCon and paying Tim Cook 100mm a year.
    1 Dec 2012, 01:29 PM Reply Like
  • That's PR math. $5.4 Billion in profits is not BAC's normal level of profitability (and therefore $2B in annual losses on these accounts isn't as big a sinkhole as it looks). There are some other fees these accounts can potentially generate that make back a huge portion of this amount (think interchange fees on debit transactions from accounts that are paid on the merchant end of a transaction and returned check fees).
    1 Dec 2012, 11:05 AM Reply Like
  • Howdy. I used to be a management consultant specializing in financial services. As referenced above, I've seen a lot of these studies.

     

    Normally, the studies DO take into account debit/credit card profitability, and they definitely DO take into account bounced check fees.

     

    In fact, one of the dirty secrets of banking is that "serial bouncers" are one of THE most profitable customer segments (prior to new regulations which may be damping this revenue stream, that is).
    1 Dec 2012, 12:13 PM Reply Like
  • Another dirty trick used by banks is to provide automatic overdraft protection, before it was recently outlawed, which is tantamount to robbing a poor man blind and utterly shameful because poor people can't afford to pay the overdraft fees of $35 each. I used to know an elderly man aged 75yrs who had a Wells Fargo checking account (which he didn't need, as he only needed a savings account). He lived off his monthly social security check and alone. He used his ATM debot card to make purchases and one fine day, his account was emptied out suddenly. What happened was that he made several minor purchases of a few bucks each at a convenience store with his debit card and he was hit with $35 overdraft fees for each transaction, until there was nothing left. I tried to help him with the bank (to get back more than $700 in ATM fees and overdraft charges) but he died before the matter was resolved. How shameful and sad.
    1 Dec 2012, 12:56 PM Reply Like
  • Thanks for the clarification.
    1 Dec 2012, 02:41 PM Reply Like
  • Will BofA never learn?! As long as these accounts are "paperless" they cost the bank little more than the electrons of the account on BofA's servers. Short term, they MAY seem to be a drag, but long term these customers will have a credit card, a home loan and perhaps, eventually, a business account with the bank.

     

    Does BofA want to alienate their future clients? I know the answer to this question and it is yes. It's in the BofA banking culture and was part of it way back in its California days. BofA's management thinks that these accounts are a burden, when the reality is that they are the basic connection to a more profitable market in the future.

     

    Like my Dad used to say, "Tip the grocery store box-boy well for helping you with your groceries. He may grow up to own the market one day and you may need a job. It would be good if he remembered you fondly". BofA take heed.
    1 Dec 2012, 12:06 PM Reply Like
  • "Our strategy is to give our customers reasons to do more business with us" says co-COO David Darnell.

     

    Thanks for the unique insight, genius. How much do you think captain obvious gets paid per year?
    1 Dec 2012, 12:28 PM Reply Like
  • Buckoux, both of our banks stop returning the checks...Now one wanted $2.oo per month for a photo copy of the cancelled chicks...I said no..

     

    Now I just save their statement as proof of payment...To clear checks, costs, I read, as little as 10 cent each...Do not forget, the Fed is also a clearinghouse of drafts and makes millions on those operations.

     

    BTW, TCF, which increased fees on checking accounts this year, removed many of the fees, as I was told that they lost thousands of account holders..

     

    A balance of $1000 per day, would allow a bank to earn about $40 to $50 per year...
    1 Dec 2012, 12:34 PM Reply Like
  • These checking accounts with small balances and no loans probably are in the red on a per account basis. Not sure it is $200 but it all depends on cost allocations.

     

    But if it takes a mainframe, data center, a call center and staff to support 10 million customers which is more customers than 99% of the banks even have then the quick math could easily drive $200 per account. The number of people that call into a center asking if their SSA deposit has cleared is really high.

     

    These might be secondary accounts for a lot of these people that they have not closed or the people are poor. I am sure credit unions don't want them either.
    1 Dec 2012, 01:03 PM Reply Like
  • $200 is a fully loaded cost.

     

    And it excludes the NPV of future larger balances and services - especially of children.

     

    Lets face it - the computer systems, system analyst support, branches, managers, executives would all still exist at the same cost level whether or not these small accounts exist. And the largest expenses associated with them are easy to reduce - simply make all accounts under $500 paperless. The other cost is call center activity but those with under $200 probably aren't calling all that often.

     

    I know this. I want my businesses to have customers - large and small. Today's "small" customer is tomorrow's "large" customer.
    1 Dec 2012, 01:19 PM Reply Like
  • davidbdc

     

    You are wrong on those assumptions. People with low balances can call a lot as they are measuring cash flow daily/weekly. Or on the other hand they may not even be using the account but BAC's redundancy requirements have to contemplate them in a BCP which is very expensive. Never mind the cost to build and run a data center runs in the 9 figures if not more. BAC is already at capacity in their data centers from what I understand.

     

    If their strategy is what you articulate then they have to figure that out and look at NPV. If they want to push future revenue streams to other banks/CU's then let them. That is their problem to solve.
    1 Dec 2012, 01:35 PM Reply Like
  • Hi Thomas,
    I would disagree with your assumption. Anyone getting a paycheck is going to be depositing more than $200 when the paycheck hits. My lowest paid employee - who works 30 hours a week (by their choice) would be depositing more than $200 every other week (but even that is electronically).
    And I believe that all banks have toll-free automated numbers to call to check your account balances plus the websites with balance info.

     

    Plus - those people depositing the $300 - $400 - $500 - $800 paychecks are the same people who want Auto Loans, in future years will want home mortgages, and later home equity loans and college loans for their kids.

     

    And finally, in all my years in business - I can count on my fingers the number of people I"ve told to leave my business and not come back - usually for either attempting to steal or for being incredibly rude to my employees. The kid paying you in change today - treated with respect - is the 32 year old very profitable customer tomorrow.
    1 Dec 2012, 02:35 PM Reply Like
  • david

     

    You are making the assumptions that they are employed and are young.
    1 Dec 2012, 04:32 PM Reply Like
  • Well, I'm assuming some of them are young, and some of them are employed - Yes.
    1 Dec 2012, 07:09 PM Reply Like
  • Tomas/David -- good discussion. As referenced above, I used to see the details of these studies. You are both making good points.

     

    Yep, there is very little true marginal/variable cost for hosting an individual account. It all comes down to allocations of (fairly) fixed overhead. The biggest dollars (admittedly, my time in consulting to banks was >10 years ago, so might be a little different now) are in branch and ATM infrastructure. Unless the bank is going to surgically kill off a lot of branches/ATM's to match up to these "negative profit accounts", there aren't going to be any savings for trying to "get rid of" supposedly "negative profit" accounts. And it's very tricky to match these up, not only for the reasons that you stated, but also because it's not a no-brainer to close down branches in "low income neighborhoods" because those neighborhoods produce a lot of bounce fees (VERY profitable customers). Please note I am not commenting on the "morality" of any of that, purely the profits.

     

    If you got rid of 10 million "negative profit" customers, you would probably be able to reduce call center staff a BIT. Maybe computer infrastructure a smidgen. But I am quite confident it wouldn't come anywhere near an amount worth the restructuring costs, pissing off profitable customers (who might be incorrectly associated with a "negative profit" account), the ill will, or the NPV of future business.

     

    Another complication -- I am "associated" with accounts held in different names. My most active/profitable account is under my name; I have multiple smaller accounts held under trusts, kids names, and some associated entities. Overall, Tricky is profitable for BoA. But if they're looking at the trust account as a separate "customer", they will get the wrong impression about the profitability of the true, overall "relationship".
    1 Dec 2012, 01:35 PM Reply Like
  • Did anyone actually read the WSJ article that SA referenced?
    1 Dec 2012, 01:48 PM Reply Like
  • Yes
    1 Dec 2012, 02:04 PM Reply Like
  • I read it. Charging fees on sub $200 balances is simply a way to tell those customers to leave. And I don't see any economic reason for that - and I don't see that there are really costs associated with most of these accounts - and the banks ignore future activity with said account holders.

     

    In today's society it is extremely difficult to function without at least a bank account. Since the government supports the banking industry through the functioning of the federal reserve I don't think its unreasonable that basic savings accounts be provided to people depositing money.
    1 Dec 2012, 03:26 PM Reply Like
  • david

     

    The government has rules around how many transactions a savings account should have in a month.

     

    Anyways there are plenty of other places to bank so why is everyone meddling?
    1 Dec 2012, 04:33 PM Reply Like
  • Listen people!
    If B of A is squeezing you out, think of it as a favor. Find a credit union. TBTF banks view customers as merely profit opportunities. You don't want to do business with them anyway.
    The two most infamous non-service, don't care a sliver for you, institutions in America are big banks and the federal gov't.
    Chad in CO
    3 Dec 2012, 10:27 AM Reply Like
  • The questions is:

     

    Should the govt dictate business decisions (Yes if socialist/communist/fa... otherwise no) ? Their analysis is what it is. nobody has the right to determine another person/entities profitability any more than other freedoms.

     

    We get so sidetracked with who has the right to do what discussions and who has a right to what ? not a productive discussion in either case.

     

    One More:

     

    Why look at the boring bank and oil company profits. If you want to see gouging based on profitability you need look no furtther than the educational system and Many of the tech names (AAPL anyone ?). The banks are small potatoes compared to the prior mentioned. Have the bank stocks gone up almost threefold. Do they have double digit prices over the last decade and with Govt subsidies (i.e college costs). The answer is obviously no to both.

     

    How about Berkshire Hathaway and Costco. They not only take in very strong earning but have played the tax avoidance game to perfection (i.e. See the latest Costco move to borrow heavily to pay out dividends).
    1 Dec 2012, 01:59 PM Reply Like
  • Don't know if that comment is for me. I don't generally have any problem with banks trying to find new sources of revenue. I'm just calling BS on the statement that these accounts each "lose them $200/year".
    1 Dec 2012, 02:06 PM Reply Like
  • TWagen, difference being that apple products are bought by choice....oil/banks are a necessity. So don't compare apple, it's a pleasure good.
    2 Dec 2012, 08:50 AM Reply Like
  • Well if they can afford Apple products they can definitely afford bank products................. is the point.
    2 Dec 2012, 03:06 PM Reply Like
  • You are right, and if banks start gouging customers, they WILL (and already are) moving to other alternatives like credit unions and online banks.
    8 Dec 2012, 09:30 PM Reply Like
  • TW

     

    Take the podium please and educate people.

     

    This country excels at chasing shiny pennies and blowing billions and trillions of dollars.
    1 Dec 2012, 04:34 PM Reply Like
  • You can blame Dodd & Frankk for this entire debacle. But then the great minds of the banking industry continue to support the Free Lunch Party...

     

    Know wonder America is going down the drain...
    1 Dec 2012, 05:38 PM Reply Like
  • A checking account fee will cause us to move our BA account to our other bank with no fees. We have 1 direct deposit at BA & a 2nd will be set up in Feb. BA should try to keep us. maybe we'll open a CD with new money. I hope BA is reading this.
    2 Dec 2012, 03:37 AM Reply Like
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