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Saturday, December 1, 2012

Bad PR and Bad Banking: BOA

How to do bad PR: Announce plans to raise fees effecting low-income customers, then pull back, wait a year, then announce such plans again, then pull back yet again. This sort of PR strategy gives rise to headlines such as, “Bank of America Backs Down on New Fees.” The Wall Street Journal could have added, “yet again.” Besides the obvious PR downside to announcing unpopular fees—and on one’s least well-off customers—is the implication of weakness or vulnerability in repeatedly backing down. In the animal kingdom, Bank of America would not exactly be the alpha male lion. Rather, the bank would be one of the other males, which may or may not get to reproduce.
                                          Having a sign and logo means that reputational capital is or ought to be considered in formulating a business strategy.   WSJ
The Journal reports that Bank of America shelved plans in November 2012 for new fees that would have “hit at least 10 million customers” by the end of that year. The decision to “shelve” the plans means that new fees on checking accounts were still possible in the following year. To be sure, other big banks too big to fail, such as J.P. Morgan and Wells Fargo had also announced plans that “aim to raise fee revenue or push customers to do more business with them as low interest rates, slow economic growth and tough new rules limit bank profits.” Those plans too are unpopular with customers. While one might expect this, there is reason to suspect that the concern is justified.
First, pushing customers to use more of their bank’s products is manipulatory. Retaining customers in the long run is achieved by matching particular customers only with the products that are of value to them. Satisfying customer desires, rather than pushing customers into products, is the basis of sustained sales. Indeed, customers appreciate a sincere effort to more fully accommodate them—rather than to manipulate or pressure them. For example, pressuring an older couple to take money out of a 401K to invest in riskier devices because the bank (and banker) make more money off the transactions does not respect or fit with what is in the couple’s interest—which is to retire with a secure nest-egg.
Second, creating new fees on checking accounts “opens banks up to criticism that they are punishing lower-income customers with policies that encourage users to hold larger balances and use multiple products.” Such “low-balance depositors don’t have a lot of money for [a bank] to make money off of,” according to Paul Miller of FBR Capital Markets. In other words, from the standpoint of making money, trying to squeeze juice out of a radish rather than an orange is not terribly smart or effective. Exacerbating the financial dire-straits of low-income/wealth depositors is also ethically problematic, as the bank is in a better condition financially. Indeed, knowingly inflicting harm, as in “you must pay more or we ‘can’t’ handle your account,” is violates Kant’s kingdom of ends (rational nature as not just a means, but also an end in itself) and triggers Hume’s sentiment of disapprobation (i.e., judgment of unethical conduct).
So in this case, business ethics is on the side of the financials. Moreover, because a bank has essentially free use of funds in checking (but not savings) accounts, charging depositors fees while the bank has the benefit of the funds is not fair to the depositors. To be sure, the 20% of Bank of America’s depositors who maintain low-balances each ostensibly cost the bank a few hundred dollars a year, though this figure probably includes over-head costs. It is not necessarily good business to apply them to every segment of one’s customer base, and an ethical argument could be made that essentially waiving the “spreading out” of fixed costs for low-income customers is legitimate. However, other customers could legitimately object to the subsidy implied in applying fix costs to some but not all customers or products.
I also wonder whether the “few hundred dollars” figure takes account of all of the benefits that the bank obtains from the funds deposited. It could also be that BOA “suffers” the loss due to its own ineptitude, rather than any economic or ethical argument that the depositors should pay more for the benefits they obtain from having checking accounts. Those benefits can be viewed as that which the bank legitimately incurs or provides in exchange for being able to make money off of the deposited funds. If the bank does a bad job of making the money off the deposits (e.g., incurring excessive risk, making bad acquisitions, and having a bad management overall), this does not justify charging depositors, whose funds, after all, the bank can use to lend at interest. Low interest rates do not mean that the customer should all of a sudden pay more, as if the bank's costs associated with managing the accounts had increased as a consequence. In other words, the stockholders (and executives) rather than the depositors (especially the low-balance ones!) should take the hit instead.

For a bank to get both a benefit from deposited funds and charge depositors fees (or require them to use other products of the bank) as though for providing the funds is like a store customer charging a grocery store for the privilege of providing the customer with food. No one would accept such an arrangement, so the resistance of bank customers to new fees on checking accounts is legitimate, especially in the case of Bank of America, whose managerial track-record is checkered at best.
Lastly, in terms of PR, “holding off on fees is a smart move from a public-relations perspective,” according to Paul Miller. However, publicly holding off sends a signal of weakness, even defeat, which undercuts depositors’ confidence in the bank. Miller himself makes the observation that banks “cannot continue to be on the front page.” This is an indication of how low the sector’s reputational capital had fallen by 2012. Indeed, Ken Lewis’s decision to buy Countrywide (subprime mortgage servicer) and Merrill Lynch, whose respective CEOs had run those companies into excessive risk (an understatement), was itself highly corrosive to the bank’s reputation. Foolishly trying to improve profit-margins by adding fees to low-balance depositors just reinforces the public’s observation that the managers at BOA are not exactly the smartest guys in the room.
To be in the banking sector, one should be intrinsically oriented to nurturing and sustaining long-term relationships in line with a steady, reasonable profit. Promoting traders into upper management is not the way to see to it that the mentality becomes infused throughout a bank. The repeal of Glass-Steagall, which had separated commercial from investment banking, and the subsequent refusal of Congress and the White House to put the law into the Dodd-Frank financial reform law of 2010 means that the underlying problem at banks such as BOA might be the interlarding of a business mentality ill-suited to banking itself.


Shayndi Raice and Robin Sidel, “Bank of America Backs Down On New Fees,” The Wall Street Journal, December 1-2, 2012.