Opinion

Felix Salmon

JP Morgan threatens small depositors

By Felix Salmon
January 14, 2011

Well done to Ron Lieber for calling bullshit on Chase’s PR spin:

Chase sure doesn’t sound happy. In a remarkable display of staying on message, it gave the same comment last week when The Wall Street Journal, CNN Money and the trade publication US Banker asked it to explain the reasoning for the new monthly fees.

“We don’t want to raise fees on our customers,” a company spokesman said. “But unfortunately, regulation is forcing us to do it. And as a result, some customers may end up unbanked.”

This statement is striking for a number of reasons, and the eye-popping earnings the bank announced on Friday don’t exactly make the company more worthy of sympathy. So I’ve spent the last week trying to figure out why I was so sure I did not believe it the instant I read it.

As Ron says, the Chase statement is trivially false: of course Chase wants to raise fees on its customers. That’s what it always wants. It already has the maximum amount of US retail bank accounts that it’s allowed — which means that it can’t increase earnings by becoming so attractive that more and more people flock to it. Instead, it would rather increase earnings by steadily culling the least profitable parts of its customer base, and replacing them with richer and more profitable depositors.

JP Morgan Chase CEO Jamie Dimon and CFO Doug Braunstein said on their earnings call today that roughly 5% of bank customers “may be pushed out of the banking system” as a result of the Durbin Amendment on debit interchange. Ron says he “sincerely doubts” that’ll happen — but I take it more as a threat than a forecast. Banks can kick out any customers they like — even embassies. The not-so-subtle implication here is that if the Consumer Financial Protection Bureau starts getting all bleeding-heart on America’s biggest banks by asking them not to gouge their poorest customers, then just maybe those poorest customers might find themselves with no bank at all.

This is pretty evil, and I hope that the government doesn’t stand for it — especially when JP Morgan earned $17.4 billion this year. Is it fair to ask JP Morgan to use some tiny part of the profits from its investment banking, wealth management, and other businesses to cross-subsidise the cost of providing free banking for poorer customers? Frankly, yes, it is. It’s the least that they can do, given the billions they’re making from the Fed’s loose monetary policy and Treasury’s implicit backstop on the debts of too-big-to-fail institutions. But instead they’re pushing back, grubbing for every dollar they can extract from those who can least afford it. Shameful.

Comments
19 comments so far | RSS Comments RSS

Can you spell “credit union”? What are those small depositors doing at Chaser anyway? I just closed my BofA account after they acquired me from Fleet/BankBoston/BayBank… Only happier day of my business life was when the contract ran out on my last Sprint phone!

Posted by ScottFree | Report as abusive
 

Just closed some accounts with this guys, got frustrated, my brother and neighbor kept a company. 11 accounts at once. think they overplayed. not a best time to expect richer depositors, but always a good time to frustrate long time loyal customers. we use to teach the world how to do business,? times are changing.

Posted by tarkastelee | Report as abusive
 

Someone should give the big money center banks a hint about how offensive their PR has gotten– particularly to the very small number of people who actually see it. Here’s a free hint, fwiw: it’s especially bullshitful when you-all start talking about your commitment to ‘community.’ EWWWW.

Posted by MattF | Report as abusive
 

Yep, my little privately owned bank as seen a lot of new customers from chase and bofa.Tey have an A- rating.

Posted by jo6pac | Report as abusive
 

Which other businesses should be compelled to offer products on unprofitable terms? Should dry cleaners feel obligated to let all customers have three shirts per month free? Do cab drivers have a moral obligation to give free rides to individuals going fewer than five blocks?

I know banks face a lot of populist rage, but this is ridiculous. You are arguing that it’s “evil” that banks do not offer a service that costs them money (checking accounts) for free. Banks are businesses. Your premise is mind-boggling.

Posted by Carl15 | Report as abusive
 

The US offers several avenues for small state and federally registered banks and credit unions to exist. They all offer federal-insured deposits up to amounts greater than poor people would need.

I am sure that we will see these small institutions grow over the next few years as they get back to their bread-and-butter basics.

Posted by ErnieD | Report as abusive
 

Checking accounts less that $2500 are almost always, as stand alone products, unprofitable for any financial institution. And the debit card interchange rate reductions to come will increase that threshold. Smaller institutions are worse at measuring account/product profitability than large ones, so rest assured that with more than 10,000 depository institutions in this nation any consumer can find a bank or credit union willing to overpay for their business. Forcing a bank like JP Morgan Chase to do it will be unnecessary, someone will do it voluntarily and with a smile at the teller counter. You’ll just have to switch once in a while as those institutions figure out their mistake or fail. This, of course, is a different issue than if big banks have gamed the system and coopted their regulators..

Posted by TRKAdvisors | Report as abusive
 

sad

Posted by write_thesis | Report as abusive
 

“Do cab drivers have a moral obligation to give free rides to individuals going fewer than five blocks?”

Imagine if they did? They would be swamped with people looking for those short rides and would have to compensate by jacking up the rates on those making longer trips. At some point, those making longer trips would decide they might as well take the subway and the cab drivers would be left with only the freeloaders.

Bank branches cost money to operate, and one way or another their customer base has to pay for itself. I agree with the principle of reducing “gotcha” fees, but the natural implication is that the cost needs to be passed on to other customers. Perhaps a $1 fee per transaction for visiting a live teller? A $.50 fee per transaction for using an ATM? My guess is that would roughly pay for the cost of the services.

The banks may be making large profits in some areas right now, but not on their traditional operations.

Posted by TFF | Report as abusive
 

Felix – your assertion that banks like Chase “can’t increase earnings by becoming so attractive that more and more people flock to it” is incorrect.
From the FDIC’s website:
“As a result of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, no insured bank or bank holding company can accumulate a concentration of more than 10 percent of the domestic deposit market through an interstate merger with, or acquisition of, an unaffiliated insured bank. Banking organizations are permitted, however, to grow through the cap by increasing their market share organically, and failed bank transactions are expressly excluded from that restriction. Furthermore, national banks may use pre-existing merger authority to effect an interstate merger that would not be subject to the cap.”
This law was designed to prevent anti-competitive mergers, while encouraging organic growth. So to assert that banks are not interested in atracting customers because of regulators is incorrect. Your beliefs about what’s “right” or not are up for debate, but the cap language is quite clear… Cheers

Posted by FDum | Report as abusive
 

Banks aren’t charities. I’m not saying they should have high fees, but plainly the fees are their choice not ours.

Maybe Apple should be forced to give away free iPods because they are rolling in it?

Look, Felix, if the banks and their execs make too much money (and I wholeheartedly agree that most do) then crack down on the illegitimate cash flows such as front-running via high frequency trading, unfair access to cost-free money and so forth. If they are too big to fail or are a monopoly then break them up.

But to control their business decisions at a micro level is completely statist.

Posted by DanHess | Report as abusive
 

For Carl15 and the other staunch libertarians responding to Felix, I would like to point that JP Morgan Chase, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley are all TBTF institutions, just as much implicitly backed by the full faith and credit of U.S. Government as the detested Fannie Mae and Freddie Mac. The get a least a 50 basis point break on the interest they have to pay on these bonds as a result of this tax payer supported benefit. They also can borrow at zero interest rate from the Fed Discount window, another lovely benefit provided by the community which goes far in explaining their recent profitability. So it is somewhat galling to hear from a Welfare Queen like Jaimie Dimon about how hold people need to start learning to like cat food and accept shortened lives as medicare is to expensive for everyone, and how all these small depositors.

As a practical idea, perhaps the U.S. Post Office can be authorized to set up a utility bank, since its former business plan of mail delivery appears to be technologically obsolescent.

Posted by sherparick | Report as abusive
 

sherparick, if it is galling to give the banks public support, then WITHDRAW THAT SUPPORT. I’m all in favor of that! But giving them this support and using that as an excuse to micromanage their business? Doesn’t make sense.

Maybe I would care more about this if I could imagine why anybody might want to bank with them to begin with? I’ve always preferred community banks, managed by real people who actually LIVE in the communities they serve.

Where does Jamie Dimon live anyways? Ain’t in my town.

Posted by TFF | Report as abusive
 

Carl 15, did you know that in 2009 Bank of America charged more in penalties and fees then they gave out in interest payment dividends?

Banks don’t do anything but infringe on real wealth creators.

Posted by SWARMtheBANKS | Report as abusive
 

@ ErnieD: the FDIC isn’t approving new bank charters (two in the last year). Their lives are easier w/ fewer banks; the upshot is that the number of banks will continue to drop as small banks fail and are snapped up by competitors.

Posted by jpe12 | Report as abusive
 

The FDIC isn’t approving new bank charters because you would be crazy to start a new bank in this environment. If you think banking is the business you want to be in you could get yourself a much much better deal buying a distressed bank.

In my state Northeast Bank (NBN) was just recapitalized by an out of state group with previous history of successfully rehabbing and selling troubled banks. Rather than start from scratch they get a profitable customer base an up and running branch network and they buy assets at a discount to book value. Granted that a discount is justified in an economy like this one but still a discount is better than paying full price to start from scratch.

The bigger issue of Mega-banks raising fees on the working class, one that the FDIC, and the media loathe to admit, is that Banking is an industry where the affluent nearly fully subsidize the the non-affluent. If you run your account properly and directly deposit your paycheck than you can get a free account at about 7750 of the 8000 banks operating in this country. At a minimum 50% of customers at a normal bank are unprofitable customers. The business model is that the top 20-30% of customers cover their costs and pay for the bottom half as well.

(The federal government works on the same model.)

Posted by y2kurtus | Report as abusive
 

Gouging fees on savings accounts and removing no fee child accounts means parents might soon be showing kids that putting money under the mattress is better than placing it in a savings account.

As someone who is happy to change banks when I need to, I recommend people look for not just the lowest fees and highest rates but all the ways a bank can entice you and then add hidden fees and remove the incentives. Ask questions.

Look at the internet and what people are complaining about. Protest verbally/in writing/ file a formal complaint about gouging fees, small print, major errors and lack of information and be prepared to find a new bank/credit Union.

I do understand that smaller accounts that use a lot of bank services would be a burden … but not that they are chased away. How about a letter advising the client/customer which account might serve their needs better and avoid higher fees, if they really cared about community. (hah fat chance, they really do want to gouge you with higher fees…they are lying!)

The big banks were bailed out…while the little guys went under. (See FDIC huge list for 2010 and already a crazy number for 2011) How nice to see that the big guys are making huge bonuses for having made huge profits after the biggest bailout* cough* welfare scam* ever perpetrated.

Sadly most banks forget they make money off your money, which is why I happily recommend … Credit Unions. Truly community service, competitive and they listen to their customers.

Posted by hsvkitty | Report as abusive
 

I’m not sure that JP Morgan Chase is threatening small deposits, but they have clearly been stealing from military service members, including those serving in war zones, and illegally foreclosing on their homes. http://www.msnbc.msn.com/id/41043127/ns/ business-real_estate/

Posted by Curmudgeon | Report as abusive
 

Actually, the prevailing environment should be a good time for capital formation into new financial services companies. Experienced managemenet will most certainly help. Short-term, it’s certaily a high hurdle.

Customers, retail & business, want options that may well be opposite to the whims of these TBTF organizations. Not every business is going to need a global network and/or team of I-bankers at the ready.

Talent is abundant, and on the cheap. Capital costs, and regulatory costs, are certainly higher. But any true start-up will not cover operating costs for the front 2-4 years anyway.

Posted by McGriffen | Report as abusive
 

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