Does a banker have to choose between a pricing policy that make money and one that wins the affection of the community?
Sometimes this seems to be the sum total of alternatives.
What brings this to mind is the response to my April 14 column, in which I wrote about the National Fee Producing Conference that the American Bankers Association held in San Francisco. I reported on the ways in which bankers are trying to generate more revenue from customers.
One idea in particular struck many as being just too much. Even Time magazine got into the act. Quoting from my column, the magazine reprinted an account of the practice I heard about at breakfast during the conference.
A banker explained how he changed his check clearing policy so that when several checks came in on an account on the same day, he handled the largest first and then worked down.
That way, he boasted, and Time reprinted, "if someone has $200 in the account and writes checks for $5, for $10, and for $300, all three then become overdrafts, and we earn $22 apiece."
$80,000 in Extra Charges
Time also reported what the banker told me, namely that his small bank expects to earn $80,000 extra this year by using this new policy.
To the banker, this may be a solid or even standard procedure of operation. He or she knows how much it costs to clear exception items.
The banker also knows the risk the bank is taking in honoring the overdraft. And the banker knows what my breakfast-table associate reported -- that it is a good way of making money.
But is there an adverse public reaction that can harm the bank more than it helps?
One panelist at that ABA conference, the well-known bank consultant Jack Whittle, uttered a resounding no.
His view was that people who overdraw their accounts know they are doing wrong and expect to be "punished."
But others feel quite differently. In the Time article, written by columnist Andrew Tobias, the tone was one of "look at the nasty things banks are doing to you." And Mr. Tobias ended his article with these words for banks: "Beware, beware, beware. . . ."
Far more outraged was the response of Richard B. Foster Jr., president of Banconsult Inc. of Okemos, Mich., a financial institutions consulting firm.
|I Couldn't Believe My Eyes'
He wrote the American Banker:
"I couldn't believe my eyes when I read Paul Nadler's recent article on what banks are doing to boost fee income.
"In the article, Professor Nadler quoted approvingly a banker who said basically: We always put our own interests ahead of the customer's.
"The article went on to describe what a banker told Professor Nadler and others about how he increased profits at his bank. The banker said that when his bank receives checks drawn on an account in which the customer has a low balance, the bank always |handles the largest first and works down.'
"There are at least three things wrong with this overdraft story. First, as the customer's agent the bank has the legal responsibility to put the interests of its principal -- in this case the customer -- before its own. This is basic agency law; the principal's interests always come before those of the agent.
"If the customers of the bank whose practices Professor Nadler described in his article obtained the services of a good lawyer, the bank would be required to refund its $80,000 profit from this overdraft practice very quickly.
"Second, and more important, once they find out about it, customers resent this kind of rip-off. Merely sending the customer a |free' overdraft voucher (which was what someone at that ABA conference suggested) doesn't take the sting out of paying the $66 in overdraft fees described in the article. Customers who are treated like this usually react by taking all their accounts to the bank across the street.
"Finally, bankers spend a lot of time complaining about the mostly onerous laws Congress has passed regulating how the banks do business.
"Laws like Truth-in-Lending and Truth-in-Savings, the Community Reinvestment Act, and laws telling banks how long they have to clear their customer's checks, to mention a few, were passed by Congress based on its perception that the banks weren't treating their customers fairly.
"If bankers continue to advocate the kind of conduct described in Professor Nadler's recent column, they shouldn't be surprised if Congress continues to pass laws telling them how to run their business.
"I thought this kind of behavior went out with 365/360 annual interest rate calculation and rounding fractional cents up or down, whichever was more profitable to the bank, No wonder many people have become suspicious of banks.
"If gouging customers is the only way banks can be profitable, then bankers should rethink the way they do business."
Who Likes Banks, Anyway?
Nevertheless, there are many who feel that a bank is never going to be loved in its community, no matter what it does.
Some bankers feel that the public is never going to warm to the institution that holds the money, charges for the privilege, and wants to be paid back when making loans.
So the banker figures: If being loved is impossible, why not charge what it costs to handle the accounts of people who overdraw their accounts. Why not make a little extra on it, too, by clearing the largest check first?
There is a lot of sad banking experience to prove that this self-interest approach may well be the best policy for the bank to take.
I remember one savings and loan executive telling me:
"Nobody appreciates what a financial institution does for its community. Many banks and thrifts have gone under because of generous loan policies to help out the more marginal borrowers in the city. But when they went under because of this practice, no one grieved for them or even felt sorry. The community concluded the bank must have been stupid to let it happen."
I also remember in New Orleans when two of the three major banks made a great effort to finance the World's Fair in that city.
The fair turned out to be a real financial failure, and the two lending banks lost a great deal on it. Yet bankers from both sides -- those that contributed and those that didn't -- realized afterward that their roles had made little or no difference in the community.
The banks that helped were looked upon as doing no more than their duty, but banks that didn't help were not criticized, since -- as the thinking goes -- "What do you expect from a bank, anyway?"
Taken for Granted
An article several decades ago in Harper's magazine talked about why businesses of all stripes make such efforts to serve their communities.
It concluded that few banks or other businesses get credit for what they do. This is because people feel that bankers and business leaders get involved in their communities for their own gratification.
When such attitudes are combined with the fact that bank customers hesitate to move their accounts no matter what, you can conclude, as many bankers obviously have, that since you are not going to be loved, you might as well do what is best for the bank.
Thus, if overdrafts are a nuisance but also a good source of income, treat them as such -- clear the large check first, as my table companion does.
Many readers will disagree. But my banker friend who gave me the story is still $80,000 a year richer.
Maybe he is just reacting to the old adage: "You can't buy love."