Banks are too big NOT to fail

It’s dinner party fodder, big banks and the too big to fail label they’ve procured. Stick around for a nightcap and you may get the dirt – big banks doing dumb things, and why, frankly, they deserve to fail.

Case in point

A friend tells me they recently applied for a loan, only to find out their credit score was not what they thought it was, instead really low. They pull their reports and find a Bank of America credit card they hold is the problem. They’ve had this card, along with other accounts at the same “institution”, for years, and rarely use it. They actually had a negative balance on the account a few months back too.

Bank of America didn’t like owing their customer money, so they transferred that credit into a savings account. The account holder eventually went to use this credit, but instead put a balance on the account…of roughly $25. They used online statements, and took care to keep track of all expenditures, so they didn’t think to check. The account went past due a few months, and the bank slaughtered their credit scores. This person will never do business with the bank again.

Bank of AmericaI had a B of A credit card, along with paperless statements, too. But I never carried the card – it was a credit line kept for special occasions – and I let the issue slide.

Here a fee, there a fee, everywhere a fee fee

Fast forward, I see B of A is about to start charging new fees for accounts, resetting their entire product line so to speak. The changes center on checking and such, with the goal to reduce face-to-face transactions (i.e. shut branches and teller services) down the road. Management points the finger at financial reforms, that, by the way, were pitched as a way to stop banks from ripping off their customers.

I once heard someone say “banks don’t want you to save…they are built to make it easier for you to spend.” A dearth of deposit slips in those checkbooks you pay for was the reasoning; still, they certainly loved handing out those credit lines, didn’t they?

Not so fast

This new fee news prompted me to log into my Bank of America account, the previous horror story still lingering in my head. The only problem was…I couldn’t. I then call the bank, and they inform me that my card had been canceled due to inactivity. I guess they must have read the blog a few times and decided I just wasn’t their kind of customer. So who is?

Their most credit-worthy customers are no doubt the ones that don’t depend on those lines. They may not help meet next quarter’s analysts’ estimates, but the default risk is certainly low – that makes them a good long-term bet. A bank’s bread and butter is, after all, dishing out loans, and revolving lines cut down on repetitive paperwork too. Nevertheless, banks are running the same customers off even though the marginal cost of carrying those accounts, with their intermittent activity and online statements, is nearly zero. On the flip side, the customers who probably can’t afford to maintain a credit line in good standing are getting hit with fees over the hundred bucks in their checking account. Under the guise of supplementing revenue lost to legislation?

The body is still moving, but the head is gone

Financial reforms were supposed to solve some of these problems – you know, help the little guys defend themselves against the evil corporate behemoth. Or at least that was how it was pitched to the public.

Unfortunately, the problem isn’t that big banks are greedy monsters – it’s that they just don’t think. The acquisition spree of the last twenty years has left them bloated and bureaucratic – there is no creativity left within. Innovation requires moving outside the box, which is nearly impossible when the crate is so big, but so crucial when the core business can be encapsulated in something as simple as a cash flow stream.

I see them failing, again, only this time we should hope the printing presses are broken. Paypal, Mint, Square, BankSimple, and likely many others like them are bound to pick up the slack.

MG signing off (to find a smart bank to do business with, knowing I’ve got my work cut out for me)