Bank of America just handed 14,000 banks and credit unions an early Christmas gift.
By changing its current policy to eliminate one-time debit card overdrafts, BofA is offering up tens of thousands, if not hundreds of thousands, of checking account customers to other depositories.
Community banks and credit unions have an opportunity to do what they do best – meet the needs of their local communities – by filling the gap that BofA is leaving. While BofA is turning its back on the retail footprint that founder A.P. Giannini first started over 100 years ago, community banks and credit unions can reassert their commitment to their local retail market.
Why so generous Bank of America?
This is the question being asked by stockholders, investors, checking account customers, and the competition. Ultimately the answer is cost.
Bank of America, like 42 other “Too Big To Fail” banks, is over $50 B in assets and well beyond its economy of scale. “Economy of scale” is long-term average cost. BofA’s checking account cost is so high the additional cost of IT, operations, sales training, and marketing support necessary to obtain consent from accountholders to Opt-In for debit card overdrafts, as is required by the Federal Reserve’s recent amendments to Regulation E, is beyond BofA’s means. So BofA has thrown in the towel.
This is where community banks and credit unions – much more nimble than their gargantuan competitor – can shine. As a group, community banks and credit unions are closer to the ground than the big depositories – internally and organizationally they have fewer layers of management, which in large financial institutions can increase costs and decrease flexibility, and externally they have close ties to their communities and customers through their participation in Rotary clubs and similar civic organizations and activities. These are strengths that community banks and credit unions can build on – to capture customers dismissed by BofA.
Didn’t anyone ever tell BofA checking is the Primary Account to build relationships?
Numerous studies by academics, economists, marketers, and others have shown the checking account is the primary financial service. This means the checking account is key to building a profitable relationship. However, being all things to all of the 130 million checking account users in the nation is not sustainable. Why? Even being Too Big To Fail does not reduce the cost of maintaining and operating so many checking accounts. So BofA is doing the right thing by dropping the debit card overdraft business. It just cannot afford to be all things to all people in checking.
BofA, along with it acquisition of Merrill Lynch, is redefining its target audience as the more upscale, higher-income consumer. Not the person in the neighborhoods who may occasionally or even frequently overdraft their checking account. So be it.
What the community banks and credit unions can do?
Enter the Too Small To Save group. These are the community banks and credit unions that don’t get government support. These are the institutions that meet the financial needs of the men and women in their communities’ day in and day out. They have the advisors who know overdraft protection is a benefit consumers – and their marketplaces – want and need. They have the management teams that can coordinate the activities of their staffs on short notice efficiently and effectively. Community banks and credit unions can provide better service for the consumer at a reasonable price and an acceptable profit to the institution. Because that is what they do.
There are 33 million Americans who use overdrafts or rely on short- term credit in some form or other. Of these, 19 million checking account holders go to payday lenders to get a small loan to tide them over. The other 14 million Americans stay with banks and credit unions and incur overdraft fees. Why?
Because these ordinary consumers have the occasional need for small loans and overdrafts. So, community banks and credit unions do what you do best. Go after the consumers that B of A is giving up. When at your Rotary Clubs, church meetings and community events tell the people, “We are part of your community and we will meet your needs.”
And Bank of America, on behalf of America’s community banks and credit unions, thanks for the early Christmas gift!
About Moebs Services
Michael Moebs is an Economist and the CEO of Moebs $ervices, headquartered in Lake Bluff, Ill. For more than 25 years, Moebs $Services has been collecting and analyzing primary empirical data about financial institutions’ services, pricing, operating expenses and financial condition in a counter intuitive approach which provides simple solutions to complex issues.