B of A's Branch-Based Model Hurts the Poorest Customers

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There are several factors that Bank of America's managers must have known when they recently started testing a new fee schedule for consumers.

First, they would once again take a lot of public heat if they implemented any broad based increases on consumer account fees.

Second, they could retain their better customers because those most adversely affected by increased fees would generally be the less affluent and least attractive.

Third, customer retention would be high considering the difficulty involved in moving a banking relationship.

They point to growing cost and lost income resulting from new regulation a the motivating reason, but B of A's management hasn't yet openly recognized that this search for new fees is the result of an unraveling consumer model built on operating thousands of costly, less productive branches. Once an important part of the bank's marketing and delivery strategy, it this effort is seen by some as an attempt to recover growing costs and declining income resulting from a continued commitment to branching model rapidly being replaced by technology.

B of A is operating two competing consumer banking models: one that has become an albatross of nearly 6,000 branches producing increasing costs and declining revenue opportunities, while building another low cost model based almost solely on technology, the internet and social networking.

It doesn't take a futurist or a tarot card reader to recognize that the typical bank branch may soon become as useful as a video store or payphones. To put it simply the importance of the branch is nearly at end except for a declining number of traditionalists who resist change. Ask any technology literate person if they see a bank branch as important to conducting commerce.

B of A seems to want to replace lost income and offset growing costs by imposing new account fees. It is apparent that any increased account fees would impact those with limited capabilities or fragile economic health the hardest. This group can't dodge the new fees by opening another credit product, as suggested, as they don't generally have the credit standing to qualify. They are typically not the sought after multi-service deposit rich customer and are usually void of other accounts or means to conduct basic commerce. If their fees are increased and become a hardship their only alternatives are to accept the increased costs, move their account to a credit union or low cost bank or operate without the utility of traditional banking services.

Banks operate with the unique license and opportunity that must be preserved. They are permitted to offer their customers insured deposits, have access to liquidity in difficult times, and operate with adequate leverage to produce strong returns. In addition most all banks have access to and use developed technology that makes operating options very flexible and less costly. In return banks are expected to open their services to persons of all economic levels at a fair and reasonable cost. Customers are not expected to be penalized as a result of their limited resources or capabilities.

Today banks are under serious public and government pressure for the recent actions of a few. They have been targeted by nearly everyone including congress, the press and are even accused of unfairness to the 99% by “Occupy” groups. As a result, banks in general have lost a great deal of their traditional public trust. Banks are in desperate need of an image transplant so the public and Washington will again regain that trust and support their long standing value to our economy.

If this newest effort of B of A is implemented it just pours more fuel on the flames of distrust. Its managers should see the total banking environment as troubled and under stress and recognize that their banking model needs urgent repair. They should implement a plan to move away from the branching model to one built on technology and committed to serving consumer of all means with value-priced services.

It might be costly in the short run but it is essential that shareholders, the public and B of A customers once again recognize the potential value of this unique historical franchise. It is important to our economy that B of A is seen as a progressive leader in banking and not a company committed to the past, desperate to pass on costs and replace lost revenue from a weathered branching strategy to the least attractive of their customers.

Robert H. Smith, the former chairman and chief executive of Security Pacific Corp., is a founder and director of Commerce National Bank in Newport Beach, Calif.

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