What are you worth to your bank?
By Mike Konczal
Let's take a breather from shadow banking to discuss commercial banking. (We play both kinds here, country *and* western.) Specifically you, as a customer: How much does your commercial bank make off of you?
I recently went out for drinks in Greenpoint with the creators of Bank Simple. Here is their blog, where they walk through all kinds of problems they see in the market and their overall project and makes for an excellent read. They are currently trying to get a clearance for running their own commercial bank -- my advice was to get a trillion dollars through leveraging with short-term liabilities and threaten to collapse the real economy, because history
tells us that those firms can get commercial banking charters in a weekend.
But anyway, we went out for drinks and it quickly got crazy and financial equations were being written down on napkins. The question at hand was, "How much is a customer worth to a commercial bank?" This is what we came up with:
There's whatever you pay in fees. Whatever you having in your checking and savings account is lent out, and the spread is going to be at least 2.5 percent, so they make a ballpark 2.5 percent off whatever you keep in your accounts. And whenever you pay with a credit card or a debit card, your bank is making at least 1.7 percent of the transaction, paid for by the merchant.
So let's assume there's this family. Let's say they make $60,000/year, so they take home about $3,500 a month after taxes. They don't live month to month, but they certainly live quarter-to-quarter, and they keep three months worth of money in their checking and savings account, so about $10,500 through the year. Let's also say that they spend half their money on essentials. Two-thirds of the remaining budget, goes through a credit card or a debit card when it is spent, so they put $1,155 through a card in a month. They are very clever and somehow manage to dodge all fees.
How much are they worth as a customer? A quick check tells us: $498.12.
Maybe you can relate to this budget. So here's a good question: Do you feel you get half a grand worth of service from your bank? Or in general are they difficult to deal with for customer service, pushy and abrasive when it comes to trying to get you to take on new products? Half a grand might be what you pay for a basic cable service; do you get that much quality from your bank?
Another thing they pointed out is how much of the banking model is predicated on how many different lines of business you have with your bank. If you live in an urban environment, where real estate is expensive, notice how much space is dedicated to commercial banking. Walk in space, staffed, looking to simply cash your check. Part of it functions as advertisement, though there are other ways to advertise. And part of that is loss-leading by national brands to sweat out the local branches and take over. But part of it is that so much of banking is dependent on the physical hard sell of adding an additional product line. So listen for when you deal with your bank, how hard they sell you on upgrades -- that's their business model. And it is one that is eventually going to die out.
-- Mike Konczal is a fellow with the Roosevelt Institute and the author of the Rortybomb blog.
Washington Post editor
April 6, 2010; 9:30 AM ET
Save & Share: Previous: World goes one way, scientists and donors the same
Next: Enforcement matters
Posted by: rfisherphotos | April 6, 2010 10:08 AM | Report abuse
Posted by: NicholasBeaudrot | April 6, 2010 10:20 AM | Report abuse
Posted by: ah___ | April 6, 2010 10:25 AM | Report abuse
Posted by: keilprti1 | April 6, 2010 10:38 AM | Report abuse
Posted by: jnfr | April 6, 2010 10:54 AM | Report abuse
Posted by: luko | April 6, 2010 11:33 AM | Report abuse
Posted by: luko | April 6, 2010 11:35 AM | Report abuse
Posted by: msoja | April 6, 2010 12:34 PM | Report abuse
Posted by: staticvars | April 6, 2010 1:40 PM | Report abuse
Posted by: wcwhiner | April 6, 2010 3:04 PM | Report abuse
Posted by: lauriemclachlan | April 6, 2010 6:43 PM | Report abuse
Posted by: kingstu01 | April 7, 2010 11:47 AM | Report abuse
Posted by: Tke919 | April 7, 2010 11:52 AM | Report abuse
Posted by: trident420 | April 7, 2010 11:57 AM | Report abuse
Posted by: jab62 | April 7, 2010 12:09 PM | Report abuse
Posted by: bankalchemist | April 8, 2010 10:20 AM | Report abuse
Posted by: systemBuilder | April 10, 2010 2:46 AM | Report abuse
The comments to this entry are closed.