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Big Banks and Small Customers

I haven’t seen this come up in recent discussions, but it’s something more people need to understand: You do not hurt large banks by withdrawing your own (small) accounts. Really. On the contrary, you’re doing them a huge favor, and making them more efficient and more profitable.

Even small banks make no money on consumer checking accounts. Big banks run a sigificant loss on such accounts (from what I’ve read, on the order of $300-$400 per account per year) and would prefer not to have them at all. Banks and bank-like institutions like credit unions and savings-and-loans make virtually all their money on loans. Checking accounts especially are loss-leaders to get consumers in the door so that bank reps can sell loans and (to more affluent customers) investments.

Large banks have angered consumers by attempting to raise fees to cover the service costs of checking accounts and small savings accounts. (The recent ATM fee debacle is a good example.) It’s become stylish to protest by closing accounts and going to smaller institutions, particularly credit unions. How this hurts the big banks I can’t imagine. Small accounts provide a certainly amount of liquidity but at a high cost in customer service manpower, printing, and general overhead. The best outcome for big banks would be to drop all customers with less than about $10,000 in cash in their accounts. They’d be flayed alive in the media if they just canceled and refunded such accounts. Now these costly customers are punishing big banks by canceling the very accounts the banks would love to cancel themselves.

I guess it makes about as much sense as anything in politics these days.

UPDATE: The article that triggered my line of thought here is paywalled and I couldn’t cite it, but I’ve since discovered this discussion with the Motley Fool guy in the Christian Science Monitor. (Thanks to gmcdavid over on LiveJournal for the link.)

There’s the additional issue that if everybody pulled small accounts out of the big banks, the big banks would feel it. However, if only a relative few participate in Bank Transfer Day, the banks benefit. The effect is not linear, and cooks down to the difference between eating their lunch and washing their dishes.


  1. Joe Goldthwaite says:

    I’m not sure if that’s true anymore. Moore’s law has dropped the price of maintaining a singe customer drastically. That’s especially true now that banks no longer have to return the canceled checks and can email back statements, etc. Most people don’t write checks, they use the ATM and credit cards that generate fees every time they’re used.

    Google probably dedicates more processing power to maintaining and customizing my seach results than the bank does maintaining my checking account. They do it for the pennies they get from advertising.

    Anyway, banks are required to have deposits before they can loan money out and I’d bet that a large percent of their deposits on hand are from all those small accounts. The big accounts carry more weight but they’re much fewer. It would be interesting to find out how their deposits are distributed. Are they mostly small accounts or accounts over $1000, $5000 or bigger?

    I agree that it would take a lot of small accounts to have any effect. On the other hand, I’ve banked with my local credit union my entire adult life. The main reason is that the credit union doesn’t have the arrogance of the big banks. I always feel appreciated. If more people try their local credit union because of this movement then that’s enough of a benefit to make it worthwhile. At least that’s my opinion.

    1. Banking at a credit union is generally a good thing; I did for many years and had no issues at all. On the other hand, I think it’s uncontroversial that banks make most of their money from ordinary consumers by upselling from simple checking and savings accounts. Making a tiny bit of money from a huge number of customers is in some ways more reliable than making larger amounts of money from fewer customers, but there are scaling issues, and a fairly narrow bracket within which you can turn a profit.

      As you say, this may have been more of a problem years ago, but I don’t think the issue can be written off completely, especially when interest rates asymptotically approach zero.

  2. Jeff, KE9V says:

    You should re-examine the way the fractional banking system really works.

    While their profits mostly come from loans, the amount of money a bank can loan is based on the funds it holds. Someone with just $500 in their checking account may actually cost the bank money, however, by having a million such accounts the bank can pivot that relatively paltry sum into billions of dollars of loans – which is how they profit.

    That a bank can do so little and hold so little and yet make huge loans “out of thin air” and all guaranteed by taxpayers should be criminal but it seems to be the way the world has been custom crafted by those who really own and run the system…

    73, Jeff

    1. As I noted in an update to the entry above, there’s an article in the CSM in which Motley Fool columnist Morgan Housel supports the idea. Actions like Bank Transfer Day scale strangely: If millions of customers withdrew their accounts, monster banks would feel it. However, if relatively few (a percent, say, which is still a lot of accounts, if not a lot of money by Wells Fargo standards) did so, the banks would benefit.

      Banks are awash in liquidity these days, and a banker I know indicated that most of that liquidity is coming from middle-class investors (and retirees) who have been scared out of stocks and bonds into CDs. People with $250K in CDs are banks’ bread and butter, and there are a great deal more of them than there used to be. People with $2000 or less in accounts don’t help much with liquidity, and servicing their accounts costs the banks money.

      I think we’re both right, each to some degree, though it’s too soon to know the details. I’m going to be watching for industry numbers in coming months to see what actually happens.

  3. Pablo says:

    Hi Jeff,

    I’m not sure I entirely agree with your assessment. Banks need deposits in order to make the loans. Last time I heard, the reserve funding was at 10% which meant a bank could lend 90% of deposits out in the form of loans. Also, my recollection is that banks made huge amounts of money on various types of fees. But I do think the fees are to make up for the costs of holding small deposit accounts.

    As a thought exercise, if banks are loaning out at 4% APR and paying depositor 0.5% APR then they are making 3.5% APY on 90% of the deposits (assuming they lend out all 90%). For a $1100 deposit account that means they’re making ~$35 a year (not accounting for any fees). Is that enough to cover the cost of holding the deposit? I haven’t a clue.

    I imagine there’s more money in credit cards than secured loans.

    Disclaimer: my understand of the banking system may be woefully out of date.


  4. Erbo says:

    For many of us, it’s not so much the desire to hurt the big banks, as it is the desire not to support their shady and outright illegal activities. For example:

    Wachovia, now part of Wells Fargo, laundered money for Mexican drug gangs–hundreds of millions of dollars of it. They pled guilty to doing so in a court of law. But did anyone go to jail? No, they got a “deferred prosecution agreement.”

    Richard Bowen, Chief Risk Officer of Citifinancial (Citibank), testified before the Financial Crisis Inquiry Commission that he had personal knowledge that, by 2007, 80% of the loans his bank was making did not meet their quality guidelines–the same quality guidelines Citi was representing to investors that bought securities backed by those loans. This is fraud, admitted to under oath. Did anyone go to prison? No.

    Banks across the country have submitted thousands of “robo-signed” affidavits in support of foreclosure proceedings against homeowners, all of which stated words to the effect of “Under penalty of perjury I declare that the foregoing is true and correct to my personal knowledge.” The people who signed these affidavits, in fact, did not have personal knowledge, and, in many cases, the “facts” in those affidavits turned out to be untrue. Perjury is a felony. Did anyone go to prison for this? No.

    I actually pulled my money out of Wells Fargo over a year ago, choosing to do business with FirstBank instead. I also recently opened an account with Star-Tech Federal Credit Union, in Greenwood Village. Both of these institutions use their money to benefit Coloradans, not Wall Street bankster fraudsters who fleece the public with one hand while paying themselves obscene bonuses with the other. I can’t control what the big banks do, but I can choose to support their efforts with my deposits, or not. And no matter whether the lack of my support makes one whit of difference to them, it makes a difference to me.

  5. If, “You do not hurt large banks by withdrawing your own (small) accounts.” why is Chase Bank spending hundreds of dollars trying to get my small accounts? Every week, I get an offer of (now) $125 to open a new account with them.

    1. Simple: Every so often these pitches (I get them too) net them someone who deposits a great deal more.

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