I used to answer customer service calls for Bank of America, one of the nation’s biggest banks. Granted, I was near the bottom of the totem pole, but they generally treated everybody with respect there (I was in Washington State, your mileage may vary), and they wanted us to be able to give customers informed and detailed answers.
During the first week of training, we were taught the core of how a bank stays in business: lend people money and charge them interest on the loan payments. I, and probably you, spend a lot more time thinking about the bank as the safe place where we keep our money and who puts their logo on our debit cards and whose ATMs don’t charge us fees. However, those are just convenient services the bank offers in order to have the money that they can lend to other people, and get a return on their investments. They offer these services for free most of the time, not only because all the other banks are doing it, but also because there are now multiple generations of Americans who are accustomed to free checking.
Most importantly, though, they offer these services for free because they can afford to, and because they need your money to loan to others. They’re not primarily in the business of processing checks and debit card transactions, they’re in the business of loan payments.
I know that banks offer dozens more services, and that operating a global corporation is complicated, to put it mildly, but since the beginning of banks, the description above has basically been the business model. If all foreign exchange, credit cards, investment accounts, home equity, and retirement services disappeared tomorrow, banks would still be in business, and still earning plenty.
But they want you to believe that the lowering of interchange fees — the money the bank makes when you use your debit card at a store — is going to force them to raise fees on other services, and that otherwise they’d go out of business.
That can’t be true. For example, in the second quarter of 2010, Bank of America earned $29.5 billion in total revenue, and they earned about $2 billion on “card income” (source). $2 billion is a large amount of money, but the card revenue represents about 7% (I’m rounding up) of the amount they earned in total. A 7% loss is about half of what you might tip a waiter, though for me it’s more like one-third of what I tip a waiter. (Note: this paragraph used to have incorrect numbers, hence the confusion in the comments below.)
Many banks are complaining through news outlets that new, future regulations regarding interchange fees will unfairly hurt their profits, and that they’ll be forced to discontinue free checking services and raise fees on other services. (See our earlier reporting on the changes to these swipe fees.)
Compared to the rest of the world, American interchange fees are exorbitant and unnecessary. They make it impossible for the corner store to make a profit when they sell you a banana and some coffee. Lowering them to something “reasonable and proportional” won’t hurt the bank’s ability to earn revenue. I admit that it might decrease their bottom line, but their bottom line has been inflated by ridiculously high interchange fees for years. Why not accept that they’ve been gouging their merchant customers and move on? It’s not as if the government is asking them to return any of this currently inflated income.
Amazingly, Citigroup’s CEO is doing just that. Last Friday he said he isn’t worried about his company’s ability to deal with lower revenue from reduced fees, even though they made about $152 million from those fees last year. So it is possible to adapt, and continue to offer free checking, and not raise other fees. At least one household-name bank is willing to play along, and I hope the other banks follow suit.
Pandit Says Citigroup Can Absorb Curbs on Fees, Cyrus Sanati, New York Times, July 16, 2010
Banks Seek to Keep Profits as New Oversight Rules Loom, Eric Dash & Nelson D. Schwartz, New York Times, July 15, 2010
Bank of America Second Quarter 2010 Earnings Presentation, bankofamerica.com