POLITICS NOVEMBER 4, 2011
Have any plans for this Saturday? The nearly 100,000 people who have pledged to take part in Bank Transfer Day certainly do: closing their bank accounts. The idea is to punish “Too Big to Fail” banks by instigating a mass exodus to smaller credit unions and community banks. Though not technically affiliated with Occupy Wall Street, it’s a practical expression of the anti-bank anger the movement has wrought.
But if the executives at the country’s biggest banks have circled Bank Transfer Day on their calendars, it's probably not out of anxiety. Whatever the intentions of its organizers, Bank Transfer Day may end helping the very one percenters they mean to punish.
At the root of the problem is that many Bank Transfer Day enthusiasts have overestimated their value to the banks they patronize: Ultimately, not all bank customers are made equal. Most customers of banks aren’t wealthy (we know from the Federal Deposit Insurance Corporation that 57 percent of all deposits at big banks are under $250,000), but it’s the wealthy upon whom the business models of big banks mostly depend. According to Jennifer Tescher, President and CEO of the consultancy Center for Financial Services Information, banks typically earn at about 80 percent of their deposit revenue from the top 20 percent of their customers.
In fact, many small-fry checking account customers may end up costing, rather than making, banks money. Hank Israel, a finance consultant at Novantas, told me the average checking account costs banks somewhere around $200 a year to maintain, just to pay for staff and infrastructure. In recent decades, banks have covered these costs—and earned money—from run-of-the-mill checking account customers in two ways. First, by milking forgetful account holders for overdraft fees; second, by hitting merchants with “swipe fees” every time those customers used a debit card (to the tune of 44 cents per swipe). But last year’s Dodd-Frank financial reform legislation put a damper on both those revenue streams: On the one hand, by offering protections against overdraft fees; on the other, by cutting in half the debit card fees that could be collected from merchants (the latter by means of the so-called “Durbin rule”, named after the Senator from Illinois who insisted on its inclusion in the legislation). Overall, Israel estimates, banks industry-wide are out somewhere between $18 and $25 billion as a result of the Dodd-Frank changes.
The law undoubtedly offered considerable peace of mind to holders of normal checking accounts. But it also had an unintended consequence: In the eyes of banks, Dodd-Frank transformed low-balance debit card holders from potentially profitable customers into almost-guaranteed liabilities. Israel estimates that a customer now has to maintain an average checking account balance of about $25,000 before a bank can profit from it. Making matters worse is that the big banks are experiencing a sort of hangover from the boom era before 2008. In those years, the banks were giving out loans so feverishly that they were gladly adding checking account customers simply for whatever additional capital they could provide. Now all those checking accounts they added in a binge can pose a burden. Without the ability to levy harsh overdraft fees or charge as much for “swipe fees”, there simply isn’t much incentive for banks to keep debit card users aboard at all anymore.
Bank of America’s early October proposal to supplement its lost “swipe fee” revenue using a five dollar per month charge to holders of debit cards should probably be understood in that context. It was designed to be a win-win proposition for the bank: either it earned $60 per year from each debit card customer with a checking count under $20,000 (more than making up for the estimated $28 per year the banks used to earn from each debit card from the “swipe fees” that Dodd-Frank disallowed)—or it would drive unprofitable customers away from the bank entirely (or at least toward Bank of America credit cards, which have become more profitable than debit cards), to the benefit of the bank’s bottom line. As finance expert and Roosevelt Institute fellow Mike Konczal told me, “This whole thing was to nudge people back onto credit cards. People who use the credit cards can be incredibly profitable.” Reuters journalist Felix Salmon goes further, writing that this move was meant to push out the customers “at the margins.”
Ultimately, the Bank of America and its competitors chose not to go ahead with the five dollar charge, deciding that the hit to their PR wasn’t worth the potential gains to their bottom line. As Diane Casey-Landry, a former CEO of the American Bankers Association told me, the public outcry against BoA was enough of a “reputational kick in the chin” that its top competitors—Wells Fargo, Citibank, and Chase—abandoned their proposed debit fees as well.
But in that way, the Bank Transfer Day enthusiasts are only doing Bank of America, and other big banks like it, a favor. By interpreting the new charges as another example of greedy perfidy, rather than as a way to boost profits by driving unprofitable customers away, the organizers are doing the big banks’ bidding.
To be sure, banks know they benefit from having small depositors as a “sticky” base of core customers: Since these customers' checking accounts are federally insured, they are less likely to make a run for it at a time of financial crisis, unlike the bigger, uninsured clients upon whom the banks currently depend for profits. But by fleeing the big banks, and making them more profitable in the process, the Bank Transfer Day participants may only be encouraging those banks into basing their business models on short-term calculations.
Worse yet, by transferring their money to credit unions, Bank Transfer Day participants may also be harming the very financial institutions they mean to help. These not-for-profit banking co-ops are governed by their depositors and are generally more customer-friendly than banks—although too big a customer base could threaten that. Indeed, a little more than a week ago, in anticipation of Bank Transfer Day, the National Credit Union Administration sent out a memo advising its federal regulators that a large influx of new customers could lead to long-term problems down the road, reminding them that credit unions are penalized if their retained earnings fall short of seven percent of their total assets. In other words, by inundating credit unions with a flood of capital they likely cannot profitably invest, the Bank Transfer Day participants may be pushing those institutions to abandon the perks that make them attractive, like free checking accounts.
Bank Transfer Day gets one basic thing right: Checking account holders have a right to take their business wherever they wish. What they forget, however, is that not everyone will want the business they have to offer.
Simon van Zuylen-Wood is a Reporter-Researcher at The New Republic.