2 Reasons Bank of America Can Exploit You

Over the past few weeks, some colleagues and I have been trying to figure out how it's possible that Bank of America (NYSE: BAC  ) can do so many bad things and still remain in business.

And just to be clear, the same could be asked about any of the nation's biggest banks. Like Bank of America, Citigroup (NYSE: C  ) was saved from the brink of failure five years ago by the federal government. Wells Fargo (NYSE: WFC  ) scores almost as poorly as Bank of America on customer satisfaction surveys. And just recently, JPMorgan Chase (NYSE: JPM  ) agreed to pay the Federal Energy Regulatory Commission a record $410 million to settle charges that it had illegally manipulated energy prices.

Far from just remaining in business, moreover, both Wells Fargo and JPMorgan are on an impressive run of consecutive quarterly profits despite these transgressions. What gives?

The answer, as best as I can tell, is twofold.

First, as I discussed here, the nation's largest banks have become particularly adroit at layering in switching costs that make it effectively impossible for customers to abandon them irrespective of mistreatment.

Ever wonder why a bank is willing to give you free checking if you set up direct deposit and/or automatic bill pay? Because it makes it harder for you to take your business elsewhere in the event things go wrong.

A consultant for some of the nation's biggest banks recently told me that between 40% and 50% of checking accounts are associated with people who live paycheck to paycheck. Assuming these accounts have both direct deposit and automatic bill pay, in turn, you can begin to appreciate their conundrum.

Quite simply, timing the switch would be difficult, if not impossible, without incurring some type of overdraft fee in either the old account or the new one. This goes a long way toward explaining why 57% of the respondents in a separate survey concluded that it's too much of a hassle to switch banks.

The second, albeit less tangible, reason can be found in the bowels of your Economics 101 textbook. That is, monopoly power. Or, a bit more precisely, oligopoly power.

This manifests itself in a number of ways in the banking industry. Absent Citigroup, which is largely a business bank, there are only three retail lenders that offer the convenience of coast-to-coast branch networks: JPMorgan, Bank of America, and Wells Fargo.

Given the uproar over the very real notion of "too big to fail," moreover, there's every reason to believe that, at least for the foreseeable future, these will remain the only game in town in this regard. As a result, these three banks are effectively insulated from the full weight of competition, which may otherwise require them to clean up their acts.

Beyond this, the entrenched competitive advantage of a nationwide branch network allows these banks to give their customers less in return for the same price that they would pay at, say, a regional or community bank. Another way to look at this is to say that the nation's biggest banks may be able to artificially raise prices on substandard financial products. Suffice it to say, this is a clear indication of market power.

In sum, the reasons banks can treat their customers poorly and get away with it is because they can. They've insulated themselves through both size and switching costs and now are simply acting accordingly.

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  • Report this Comment On August 11, 2013, at 10:21 AM, sabebrush6 wrote:

    Bank of American can & will exploit you because you smile and let them. Shame on you.

    Go to a credit union. You are part of them and they treat you like that. None of this fee, fee, fee crap.

  • Report this Comment On August 11, 2013, at 10:41 AM, Glitch77 wrote:

    And employers are making it much easier to take your business elsewhere. I can change my direct deposit at the click on a mouse. Moving billpay accounts is a pain but worth the move.

  • Report this Comment On August 11, 2013, at 10:42 AM, Glitch77 wrote:

    I went to a credit union and had to change again as I was being charged $1 every time I used my debit card. Credit Unions have issues also.

  • Report this Comment On August 11, 2013, at 11:37 AM, Soosiee wrote:

    I left BOA once. Went to a community bank with a technically inefficient website where the clerk who opened the account convinced me to apply for a $70k equity line of credit (I wanted $15k, she said, oh, let's see what happens ...!). When I was approved they still had not disclosed the terms, the bank *manager* said she couldn't give that information until the closing. Ummm ... credit card issues, problem problems problems. I happily went back to the only place where I don't have trouble accessing my money, I don't pay fees and I know for a fact they test the security system.

  • Report this Comment On August 11, 2013, at 12:07 PM, teelo13 wrote:

    They can exploit you because you can end up being their customer even if you never wanted to be. About 6 months after we bought our current house, Bank of America bought our mortgage from our current lender. And it makes no sense to re-finance within the first year of buying a house, so we were stuck with them. So even though I had severed all ties with BofA around 2005 (they were my first bank account back in 1990 when I got my first job), I am back to being their customer and them making money off of me...

  • Report this Comment On August 11, 2013, at 1:07 PM, snookypoopoo wrote:

    I am a Bank America customer because I got tired of belonging to those small community banks and every few years they would get bought out or merge. Every single time my accounts would be screwed up and it would take days/weeks to resolve -- too much frustration/enough. We pay “NO” fees as preferred customers. Yes we also belong to a credit union, just in case as a backup ;-)

  • Report this Comment On August 11, 2013, at 2:30 PM, MichaelOFaolain wrote:

    As many note one problem of the many that exist in the banking business (I'm generically including credit unions also) - it's the 21st Century and internet banking needs to be a priority over buildings.

    We use a local bank in addition to BofA. The online experience with that bank has been a nightmare at times. And their solution each time has been to come into the bank. If I wanted to go to the bank, I'd find a time machine and go back to 1955 when that was a good experience.

    I'm not happy that BofA has closed our rural local branch and many others, but I'd trade the BofA online experience any day for the "benefits" of local banks and credit unions - and yes I've tried different ones.

    My BofA checking account is free. I don't keep a large balance in it, I don't use them for saving and investing. I most certainly wouldn't get a loan from them. But for hassle-free checking and online bill paying it simply is everything I'd want.

    And over the last five years, the three times things seem to not work I could call and get answers and fixes. No one said "come into the bank." How 21st Century.

  • Report this Comment On August 11, 2013, at 2:33 PM, bigalnc wrote:

    The first answer is "they do 'it' because they can."!!!

    So change to local credit unions. If they get bought up, change again.

    Look, even for those living "on the edge", like me, there's a month; maybe two where things don't go well. Immediately convert paychecks to cash, eat cheaper, miss payments, do whatever!!!!

    We've become slave to credit scores that don't do us any good to begin with --- and guess who promotes the necessity of humungous credit scores? The biggest banks and their cronies.

    Here's the key. Remember the old saying, "Owe the bank a thousand and the bank owns you. Owe a billion and you own the bank." Well, among us, we OWN the banks. And it's among the reasons why the mega banks are so willing to forgo "personal" banking......and yet, we DO have the collective power to bring them to their knees.

  • Report this Comment On August 11, 2013, at 2:45 PM, ramatgan8 wrote:

    Bank of America trains their workers to exploit customers. They forced me have an escrow on my tax and property insurance on my refi note for which I have to hire a lawyer to straighten them out, because they totally ignored me. They never recalculated or corrected my schedule of monthly mortgage payment, except to tell me that I will pay off early by 6 months. If I decide to pay off early, I may again be forced to hire a lawyer.

  • Report this Comment On August 11, 2013, at 9:53 PM, comedygene wrote:

    I have never agreed with the "too big to fail" idea. instead of a bailout, our government should have made them divest all assets in the US and bar them from doing business in the US for 3 years. companies would clean up their act.

  • Report this Comment On August 12, 2013, at 12:06 AM, dlb7 wrote:

    I been trying due a modification loan my house over a year and half, kept sending

    same paper work over and over. I got almost up on my back payments and then they put me in forecloser. Still working on my loan. Just the other day . The Justice Department comes down on them. What was my balance of my loan. they added my past behind payment plus other fees on top of it During this time of my loan they

    ask me to no to make any payments on my loan. Now they have sent me my modification. How can this be just to the American people when we bail them out with are tax dollars.

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