Friday, February 12, 2016

Should everything be FREE?

Things that are free are worth what you pay for them.

A reader writes that he is frustrated with his bank, because they summarily closed his bank account and he could not understand why.   He was doing nothing illegal.  He was not money laundering or check kiting.   He simply had a checking account, made deposits, wrote checks (or had automatic payments made using bill pay) and transferred the rest of his money to an investment account, keeping a minimal balance in the checking account.

While the bank could not articulate why they were closing his account, he surmised - correctly, I think - that they were closing his account because they were not making money from him.

Banks can't stay in business making change, as I have noted before.   And in today's low-interest world, there is little to be made on savings account balances.   Back in the late 1970's when interest rates soared into the double-digits, "free checking" became all the rage.   Banks vied for your business simply because if you have even $1000 average daily balance in your account, that amount could be invested in a 14% mortgage and generate a lot of cash for the bank.

Moreover, if you had a relationship with a bank, chances are you got your mortgage there, your car loan, and your credit card.   Today, we get a car loan from the car dealer, a mortgage from a mortgage broker, and a credit card from some site online.   For the bank, there is no ancillary business to be had from the checking account holder to make having him as a customer worthwhile.

And back then, before the advent of personal computers and cell phones, most folks kept hefty balances in their checking accounts as a means of avoiding bouncing a check.   We had no way to check balances on a daily basis, so you had to wait until the end of the month to reconcile your accounts.

In the mid 1980's, they started using "pay by phone" type DTMF systems, where you could call in, provide you account number and PIN, and then check your balance, see if certain checks had cleared, and even make payments to the utility company or the mortgage company.

And by then, interest rates were dropping.   Yet banks still offered "free checking" with no monthly fees - which became the new norm in the banking business.  Once you get people hooked on "free" is it awfully hard to wean them off of it.

Fast-forward a couple of decades and today interest rates are fractional.   Online banking and smart phones (and Check 21) allow you to monitor your bank balance down to the penny in near-real-time.  There is no need to keep huge balances in your checking account as a buffer, when you could be investing that money in your trading account - and transferring the money back and forth in near-real-time to cover outstanding checks and bills.

Free checking, free ATMs, free stock trading, free everything.   If you are an astute banking customer, you can end up paying no fees at all to your bank, as I have noted before.   And if you use online bill pay, the bank may actually have to cough up 49 cents for each check they mail out.   Add in the cost of overhead of running all those branchs, ATMs, computers, and whatnot, and you have a real loss on your hands, if your customer is astute and solvent.

The insolvent customer, on the other hand, is a real money-maker.  Like with payday loans, the banks make money from the poor and stupid.   The low-balance user who continually bounces checks (paying huge bounce fees) and regularly pays foreign ATM fees is a cash-cow for the banks.   Ironically, the banks might actually want him as a customer.

Similarly, clueless Joe Middle Class who wants to refinance his house a fourth time to take "cash out" to pay off his credit cards and the loan on his Mercedes, is a real money-maker for the bank.   Odds are, he also has an "airline miles" or "cashback" credit card with the bank that not only generates transaction fees for the bank, but charges a hefty 18% interest rate - and like most Americans, Joe carries a monthly balance.

So they want Joe as a customer, and if you see how the bank structures their website, this is not hard to parse out.   They promote consumption (Cash-back "rewards" schemes - more on that in a later posting) as well as debt consolidation loans.  They promote a lot of things that pay the bank a lot of money.

But the solvent customer who balances his accounts daily?  He never bounces a check and is smart enough not to pay foreign ATM fees.   He doesn't carry a credit card balance and hasn't applied for a home equity loan - or a mortgage.   His car is paid off.  He owes no one.  He is unprofitable.

So my reader is upset that the bank is giving him the boot.   After all, as a fiscally responsible customer, don't they want him?   Well, they would, if they could make money off of him.

And banks are trying to charge monthly user fees nowadays - with limited success.   Bank of America socked me with a monthly fee which I was outraged by.  A helpful clerk on the phone pointed out that if I merely transferred $25 a month into savings, the fee would be waived.  It took seconds to set this up as an auto-transfer and problem solved - for the time being.   Obviously, BoA wanted customers to have a savings balance, so they could increase their capital on hand (which these days is a big issue for the banks) and they created this loophole.

(They also wanted a way to get rid of "dormant accounts" - abandoned accounts with trivial balances which are just a bookkeeping nightmare for banks, particularly smaller ones.  If you can suck these accounts dry with a monthly "maintenance fee" you can close them over time). 

Unfortunately, savvy customers like me figured it out, and transferred the money to savings, avoided the monthly fee - and then transferred it right back.   It is like skip-lagging the airlines.   They make the rules, and we find ways around them - or ways to work them to our advantage.

The next trick in their bag was to charge a monthly fee if you decided you wanted to use a teller.   If you used a teller in a transaction even once a month you would be charged a nominal fee (about $8 as I recall).   This reflects the real cost of keeping branch offices open and paying those tellers to cash checks.   And a lot of people in this computer age still use tellers.   If I go to the bank on a Friday, people - usually poor people - are lined up out the door.   Meanwhile, the line at the ATM is zero.

So they have a cost center - why not charge for it?   For me, the workaround was to simply not use a teller and agree to use only ATMs or the online website for deposits and withdrawals.   And for the most part that worked out well.   But still, the bank is making nothing from me.

One way of getting more business was to entice me with an offer from Merrrill Lynch.  If I would transfer X dollars to their investment bank, they would waive all fees and make me a "Platinum" customer which not only allowed me to use the teller, but got me a free foot massage while I was waiting.

Well, it was not all that great.   They managed to close my account while I was out of the country anyway.  If this is how they treat "Platinum" customers, I shiver to think how the mere "Silver" customers are treated. Perhaps they have a pit filled with punji sticks.

Maybe the problem isn't the banks, however.  Maybe the problem is us.   We were raised on a diet of "Free" and weaning us from this is damn near impossible.   And the Internet has made it even worse.

Everything on the Internet is "Free" more or less, and few people pay actual money for programs, websites, or whatever.   We expect everything to be "Free" and many internet companies are struggling to make a profit because of this.

They put up ads to generate revenue - and we put up ad-blocker to stop them.   It becomes a vicious circle.   Sites such as "Twitter" are slowly going broke because ad revenue isn't enough to cover expenses.   No one will actually pay for Twitter and if you charged a monthly fee to Tweet, I suspect the site would shut down in a matter of months.

Facebook makes a little money with the ads, but they have to walk a fine line between spamming their own users and hemorrhaging cash.   Many before them (such as MySpace) were unable to keep up this tightrope walk for very long.  Facebook users live in fear of the day Facebook will charge for the service (this is a regular Facebook rumor, but likely will never come true).  So Facebook has to find ways to make money from online games, or sponsored posts or whatever.

Maybe - just maybe - the idea of "Free" is flawed.   While I still do business with BoA (even though they kick me in the teeth on occasion) the relationship is based not on the traditional banker/customer relationship, but more on the advertiser/viewer relationship of television.   Whenever I log onto BoA, they are trying to sell me something - a credit card, a cash-back deal, a "rewards" offer, a mortgage, a home equity loan, or a debt-consolidation loan.   They have to keep selling me something or they would go broke.

Yet few of us would pay a nominal amount per month in order to have a real fiduciary relationship with our bank.   We all want "Free" and what we find out in the end is that the "Free" stuff kind of sucks and really isn't free at all.

Like I said, weaning people from "Free" will be damn near impossible.   So long as everyone expects freebies, no one will be willing to pay.   It is a mindset that is hard to shake.

We were in Key West a few years back, and they had a sailing regatta going on that week - a few weeks after the big powerboat races.  We were talking to the folks at West Marine about this, and opined that it would be a good week for business.   "With the powerboat people, yes," they replied, "They have deep pockets and don't mind spending."

"But the sailors?" he said, "They think that since the wind is free, everything else should be as well"

And that illustrates how the "Free" mindset can take hold.

Would I pay a monthly fee to have a bank account?   Sadly, probably no.  Not as long as there is a Free alternative.

And right there is the problem.  We have met the enemy and he is us.