The Washington Post recently published a half-assed, shoddy analysis in an editorial titled What Are You Worth To Your Bank. In it, the writer, a “fellow” at some place called the Roosevelt Institute (I think it might be named after Roosevelt O’ Donnell, not Teddy or Franklin), presents a model for how much a bank makes off a customer.
He estimates that what a customer is worth to bank is equal to the fees the customer pays plus 2.5% of what’s in checking/savings accounts plus 1.75% of that customer’s card-based (credit and/or debit) transactions.
He makes some assumptions about average income levels ($60k per year), spending and savings patterns ($10k in checking/savings, $12k spending per year), conservatively assumes a customer can avoid fees, and puts the average customer value at around $500.
I actually don’t have a big problem with these assumptions, other than the fact that the cost side of the equation is ignored, so what he’s really talking about is not the “value” of the customer to the bank, but the “revenue generated.” But hey, let’s let this one slide.
Here’s where I have my issue: In the typical self-righteous, bank-bashing tone that is so common today, the author poses the question to the reader:
Do you feel you get half a grand worth of service from your bank? Or in general are they difficult to deal with for customer service, pushy and abrasive when it comes to trying to get you to take on new products? Half a grand might be what you pay for a basic cable service; do you get that much quality from your bank?”
There are two things wrong here which make these questions completely asinine questions to pose.
First of all, what about the financial benefits that the customer might be accruing here? Using the writer’s checking, savings, and spending figures, how about assuming the following?
- The customer puts the checking/savings in a high-yield account and gets 2.5% on that money. The interest generated on the $10k in checking/savings comes to $250 (for simplicity sake let’s not get into the compounding).
- The customer has a rewards-based debit and credit card, and gets 1% cash back on her spending. The cash back on the $12k of spending comes to $120.
So for the $500 the bank is making off the customer, the customer is getting $375.
Let’s return to the writer’s question: Do you feel like you get $125 worth of service from your bank?
Well, considering it gives me the ability to put my money someplace other than under my mattress, gives me tools to track and manage my money, does a pretty damn good job of making sure that criminals and fraudsters don’t get access to my money, and does a pretty damn good job of detecting potentially fraudulent transactions on my credit and debit cards….then YES, I do feel like I’m getting $125 worth of service from my bank.
But the questions the writer poses are ridiculous for another reason: Quantifying the “service” the customer gets from the bank has nothing to do with the “value” the bank gets from the customer.
Let me give you an analogy. Assume I’m online all the time, use Google all the time, and click on sponsored links. It’s feasible to estimate that Google might make $250 per year off of me. But is it a valid question to ask if I get $250 of service from Google?
No. There’s actually no way for me to price on that service, unless Google wants to start charging me. If Google came to me and said “we’re going to start charging you $250 a year to use our search engine”, then I’d bounce over to Bing faster than you could say boo.
What we have here with this Washington Post editorial is nothing more than a lame attempt to jump on the bank-bashing bandwagon. Unfortunately, the writer picked a pretty poor example to try to make his case.
Look, I’m not saying that the banks have been angels and saints and are immune from criticism, but if you’re going to criticize and bash them, do a better job of analysis. Oh, and it might help to understand the difference between revenue and profit.
UPDATE: A colleague of mine pointed out that I missed something in my calculations. Online bill pay saves him $5/ month on postage. Add that in and the customer is up to $435 in “value.”