Financial Masochism: Why Bank of America Can Have Its Way with You

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What do you think would happen to a restaurant if it had horrible customer service and served mediocre food? Or a hair dresser who butchered your new 'do and then proceeded to re-run your credit card for an additional $10 tip?

I think we can all agree that they'd go out of business. At the very least, one wouldn't expect them to flourish.

Yet that's exactly what's happening with banks.

No surprise: People don't like banks
According to a recent Gallup poll, only 26% of people have either "quite a lot" or a "great deal" of confidence in their banks. In fact, Congress is one of the few institutions that scores lower in this regard, said financial bureau chief Matt Koppenheffer, author of our exclusive free report about the market's nine best dividend stocks.

And the nation's biggest banks are the worst offenders. In a J.D. Power & Associates survey of customer satisfaction from earlier this year, Bank of America (NYSE: BAC  ) and Wells Fargo (NYSE: WFC  ) ranked at or near the bottom of the industry in every geographical regional examined. And they were the absolute worst performers in this year's survey of bank reputations by industry publication American Banker.

At the same time, both of these banks, as well as the nation's largest lender by assets, JPMorgan Chase (NYSE: JPM  ) , are racking up record quarterly profits. In the three months ended June 30, for instance, they earned a collective $12 billion.

What gives? If customers are so unhappy, why aren't they fleeing in droves?

The banks have you right where they want you
The answer it turns out has to do with switching costs -- that is, the amount of money and time it would cost a customer to switch from one bank to another.

Ever wonder why banks are such proponents of direct deposit and automatic bill pay? The reason is that it makes it harder for their customers to abandon them.

This point was driven home to me last week in a conversation with a New York-based banking consultant. According to him, the owners of between 40% and 50% of checking accounts at the nation's largest banks live paycheck to paycheck.

Imagine how delicate of a maneuver it would be for these people to switch banks without incurring an overdraft or insufficient-funds fee. If the direct deposit was transferred too early relative to the automatic bill pays, then the old account would be in jeopardy of a negative balance. If it was too late, then the new account would be.

Meanwhile, on the other end of the spectrum, larger account holders have little to no incentive to change banks, as they're treated comparatively well. I discussed this last weekend with respect to Bank of America, which has prioritized deepening its relationship with its 8 million "preferred" customers while at the same time cutting the costs associated with servicing its 40 million "retail" customers.

Don't worry, be happy
The net result is that, at least insofar as account retention is concerned, there's really no such thing as reputational risk for the nation's biggest banks.

Needless to say, this is great news for bank investors, as the negative press about the big banks' various transgressions should ultimately make little to no difference with respect to their success and valuations. But also needless to say, it isn't quite as good for the customers that unwittingly find themselves on the other end of it.

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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 27, 2013, at 12:00 PM, tr212 wrote:

    I finally broke down and signed up for a credit card which they pressure you to "replace your debit card with". They ran my credit and gave us a $5000 limit. Two months later I was denied a purchase and was extremely embarrassed. It turns out they reduced my limit to $2500. I made all payments to them on time. This is unacceptable behavior to a loyal customer as myself. It should be illegal. I am changing banks soon because of this.

  • Report this Comment On July 27, 2013, at 1:18 PM, frankhamo wrote:

    Your analysis is flawed. The Banks don't make a significant portion of their profits from the people living paycheck to paycheck. They make their profits from their preferred customers-- that's why they're preferred.

    The paycheck-to-paycheck crowd are a tax on Bank profits. So the flame-baiting title of this article comes from an ill-informed understanding of how banks operate.

    The big banks would cheer if every paycheck-to-paycheck customer moved their business to a competitor.

    Before you buy more share of BoA, learn something about Banks.

  • Report this Comment On July 27, 2013, at 1:51 PM, Wasatcher wrote:

    Bank of America had its way with me alright . . . they absolutely refused to help me keep my home after the economy collapsed through no fault of mine, but turned right around and practically gave it away to some rich guy for cash in an amount that didn't even cover the cost of building it 12 years ago! I will never understand it and that thieving bank's refusal to help us keep our home, after paying cash for the land, bringing equity from previous home ownership and nine years of large mortgage payments, absolutely destroyed MY American dream and nobody at BofA gives a damn!

  • Report this Comment On July 31, 2013, at 12:10 AM, dreamsound wrote:

    Bank of America is the best bank out there. You can travel to 90% of the nation and have access to ATMs vs. Wells Fargo and Chase. I travelled to Spain, Mexico, U.K, and other countries and they have the global alliance network there. No ATM fees! Best and safest Online Banking. Why do people expect the banks to pick up the tab if you cant pay your darn mortgage!!! PAY YOUR BILLS people and stop complaining!! If you can't get a job, and overdraft their accounts or can't get credit I feel bad for you but DONT BLAME IT ON THE BANK!

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