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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.

By Washington Post editor  |  April 6, 2010; 9:30 AM ET
 
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Comments

Interesting equation, but deciding what you're worth to your bank doesn't dictate what your bank's services should be worth to you. Your fictional family isn't likely paying $500 a year for their account; in fact, the value they get from their transactions with that bank really hinge on the interest earned on their account, the credit available through that bank and the cost of the various services they do receive.

I think this is an interesting example of the misled consumer ideal that you should get as much benefit from a transaction as the party on the other end of the deal. In reality, you should take the best deal possible (here, the bank with the cheapest fees and highest return for your money), and that value may or may not be close to the other party's benefits.

Posted by: rfisherphotos | April 6, 2010 10:08 AM | Report abuse

Rather than the raw dollar amount, if you look at the bank as providing value equal to less than 1% of total cash flow through all your accounts, that's a decent deal. Now, a Vanguard account offers you .20% of MoM, but you do way less with a vanguard account.

Posted by: NicholasBeaudrot | April 6, 2010 10:20 AM | Report abuse

I'll look at it from a different angle-I assiduously avoid fees. Every so often there's a slip-up (a check clears earlier than expected). They are quite reluctant to waive the fee as a courtesy, which highlights how much of my "value" comes from fees, despite relatively high C+S balances.

Posted by: ah___ | April 6, 2010 10:25 AM | Report abuse

Mike,

Debit card transactions are worth considerably less than credit card transactions. they are transactional costs rather than percentage costs normally. also, the rate varies whether you're paying your utility bill, making purchases at a large grocery store or small coffee stand or record store (small means they pay more).

ATM fees require very clever hypothetical couple indeed! I find those particularly odious.

Posted by: keilprti1 | April 6, 2010 10:38 AM | Report abuse

My husband and I do 95% of our banking through a local credit union, which is well-financed and well-managed. The customer service is outstanding. The interest rates on loans and our one credit card is far lower than the average at commercial banks. They do have the same types of overdraft fees and such that other banks use, but we're pretty cautious with our money so we don't bump up against those often.

I feel like they are an excellent value, and they're welcome to whatever money they make from us, which they turn around and lend to other members of our state. Our credit union is everything a family bank should be.

Posted by: jnfr | April 6, 2010 10:54 AM | Report abuse

Also depends on the cost of the alternatives. I've been around the block a few times and at one point all my "banking" was done at a drugstore and all my bills were paid with money orders. This was before the time of the payday lenders so in that regard I was pretty fortunate. Still it cost me close to 4% when you added it all up. Compared with that the <1% the bank "charges" which is the better deal?

You can't really get by anymore without a certain cashflow and that has to go through some kind of banking institution. That's why, to me, it was a big mistake when people knee-jerked when Wal-Mart wanted to enter commercial banking.
My guess is Wal-Mart could give people a pretty good deal on banking services.

Posted by: luko | April 6, 2010 11:33 AM | Report abuse

Retail banking I guess is the term. They have a commercial bank.

Posted by: luko | April 6, 2010 11:35 AM | Report abuse

---"Whatever you having [sic] 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."---

Implying that that is a cost to the customer is dishonest, but I would expect nothing less from a guy substituting for Klein.

Posted by: msoja | April 6, 2010 12:34 PM | Report abuse

Of course, if the Federal Reserve wasn't forcing rates to be artificially low, you would actually make money the really old fashioned way, via interest. Your analysis is off in some silly ways, but missing that is truly stupid.

I look at banking as a way for money that I am saving for something in the future to provide value to the rest of the economy. If it is being loaned out at 3.5%, and if some percentage of those loans default, then there isn't much room in there for me to earn interest, especially on short term money that I need to be extremely liquid. Using a bank to get some interest is a fundamental device of spreading risk amongst lenders.

I'm not generally looking at banks as some kind of service institution. In fact, paying for branches to be open at all hours and whatever services the rest of you think you need is a big negative. However, having a great website that allows me to pay my bills online is a huge plus. I'd be willing to pay $10/month for it.

Posted by: staticvars | April 6, 2010 1:40 PM | Report abuse

"..deciding what you're worth to your bank doesn't dictate what your bank's services should be worth to you:" of course not, but fees matter. If our housecleaners doubled their rates, they'd still be worth it to us -- but we'd fire them and hire a competitor.

"ATM fees:" learn to love the "Bank of Costco" (or wherever you buy your grocerieas), and always get cash back.

"a local credit union.. customer service is outstanding.. an excellent value:" exactly my experience with my CU. I remain baffled by the millions who instead bank with the money-center banks who treat them like a mining claim to be exploited.

"Implying that that is a cost to the customer is dishonest:" say what? Every business needs to make money, and retail banking should make most of its money on that spread. 250 bps seems like a bargain given the considerable liquidity advantages of demand deposits.

Posted by: wcwhiner | April 6, 2010 3:04 PM | Report abuse

I wholeheartedly agree that the business model established by branch banks is going to die out and for good reason: US banks spend roughly $80B every single year just to keep their branches open. They have to make that money back somehow.

I work for PerkStreet Financial and we invest in giving people things they truly value.

PerkStreet would pay the fictional family you mention over $200 in cash back in their first year for their normal debit card spending, not to mention what they'd save by having access to more ATMs than other banks provide.

I like that we give people rewards for spending smart using debit (not high interest credit), we give access to more free ATMs than Bank of America and Chase combined and we answer the phone quickly when our customers call.

Laurie McLachlan
www.perkstreet.com

Posted by: lauriemclachlan | April 6, 2010 6:43 PM | Report abuse

What does Bank Simple offer that I can't get from Bank of America?

"We will launch later this year with a simple card with in built checking, savings, rewards and a line of credit. As we add more competitive banking services, you can personalize your features as your needs change."

I already have all that and I get free checking with direct deposit.

Posted by: kingstu01 | April 7, 2010 11:47 AM | Report abuse

First, great piece.

While most of this is true of the big commercial banks, credit unions and small community banks (as others have noted) usually have lower fees, better service, and focus on serving the community rather than making gigantic profits.

That's not to say that all CUs or CBs are wonderful, nor that they're non-profits who aren't interested in making money.

It's just that they usually have a better understanding of their customers and those customers needs.

For example, the bank I use processes checks and transactions in date order, not by biggest to smallest [as many banks do in order to cause overdraft fees]; limit overdraft fees to the first $10 over [and only charge a single, flat fee]; and allow up to five ATM withdrawals at other banks' ATMs without charging a fee.

Little things like that add up for a consumer, and is where most banks are heading -- either by regulation or choice. And that's a good thing.

Posted by: Tke919 | April 7, 2010 11:52 AM | Report abuse

I'd say I get more out of my bank then I do out of a cable provider. I bank locally at a small bank. Maybe I'm biased because even though I'm a small depositor everyone knows my name when I walk in the door or call on the phone, emergency loans are issued within hours of request, and all courtesy notes are handwritten. There's something wonderful about the personal touch that keeps me from returning to a big bank for the extended ATM access or gimmicky rates.

I really cant relate to someone who is treated like a number at a big bank, but I know I get -my- money's worth.

Posted by: trident420 | April 7, 2010 11:57 AM | Report abuse

Why not just use cash? I pay my home loan each month in cash, which is withdrawn from my credit union account (at no cost). I then walk down to Wells Fargo, give them cash. They do not like it, as they don't know where my money comes from. Cash always works, with no fees. Pay for everything with cash and the world is green.

Posted by: jab62 | April 7, 2010 12:09 PM | Report abuse

Banking by most definition is an aggregate business especially when evaluating the consumer account. In aggregate its these many deposits which the bank has access to for its lending needs to business clients where on a case by case basis the per account probably has a greater value. So a banks operational efficiency is key to maximizing these values. This requires our classic bankers CHEAP TO THE MAX GUYS to consistently invest in their own product. BANKACHEMIST.

Posted by: bankalchemist | April 8, 2010 10:20 AM | Report abuse

Ezra,

did you forget about fractional reserve banking? That 2.5% spread on the "6 months reserve" of $1050 held on deposit at your bank, is lent out 10x because of fractional reserve banking (10% reserve requirement in the USA as of 2007.) I calculate that the bank, due to fractional reserve banking, earns $3385.2 on your business. If you hold all of that money in a CD or savings account, it can be lent out even more!

Posted by: systemBuilder | April 10, 2010 2:46 AM | Report abuse

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