A Good Bank for Investors Isn't Necessarily Great for Consumers

At The Motley Fool, we tend to talk about companies from the perspective of investors, not consumers. But while these two perspectives can sometimes meld, that's rare in the bank industry, as we all learned recently when it was revealed that thousands of Wells Fargo (WFC -1.11%) employees opened up to 2 million fraudulent accounts for consumers.

Analyst Gaby Lapera and contributor John Maxfield discuss this tension in the latest episode of Industry Focus: Financials, a weekly podcast dedicated to the financial sector.

A full transcript follows the video.

This podcast was recorded on Sept. 19, 2016.

John Maxfield: The thing to note here is, there is an inherent tension between what an investor looks for in a really good bank and what a consumer looks for in a really good bank. Now, there are some overlaps, but most of it is more of a conflict. Let's think about that. If you're bank investor, what do you want to see? You want to see a bank that's well-diversified, that they don't just earn money from their asset portfolio, they also earn fee income. Well, if you look at the fee income, where does the fee income come from? It comes from account fees, overdraft fees, insufficient funds fees, things like that. Those are not consumer-friendly things. While diversification is good for investors, it's not good for the consumer. We talk about transparency. You want to know what financial products you're getting, what they do, all those different things. You want to understand what you're buying. Well, banks don't have an interest in making those things clear. If you don't exactly know what you're getting, or the fees associated with accounts, it's a lot easier for banks to ply you for additional fees if you don't know what's happening.

Gaby Lapera: You are so right. And there's federal regulations surrounding this now, especially around mortgages. If you happened to get a mortgage pre-financial crisis, and another mortgage post-financial crisis, you probably have noticed that you get handed a paper that makes it very clear what the terms of the mortgage are. That was something that was federally mandated post-financial crisis, because they felt a lot of consumers didn't know what they were getting into with their mortgages, especially in terms of the interest rates.

Maxfield: Yeah, that's exactly right. I know a lot of people don't like Obamacare, but it's the same principle that Obamacare was going for with the exchanges. If you put all this information in a simple format, where you can compare all the different companies that are offering these products, that will make those products more competitive, which means it will lower the price for consumers. But if you go against that transparency, you're going to get wider margins. That's good for investors and bad for consumers.

Lapera: Right. And I want to point out, this clarification of what's going on with the mortgages, that wasn't the banks just saying, "You know what we should do?" No. This was the federal government saying, "No, you have to do this." Because the banks, like I said, they're interested in keeping their investors happy and keeping themselves running and making more money.

Maxfield: That's right. When banks talk about this, they talk about how banking mortgages have been commoditized. They mean that as a negative thing. But from the consumer's perspective, commoditization of mortgages a good thing, because that means that the bank isn't earning a lot of profit out of that.

Lapera: Yeah. Another thing that's good for investors and good for a bank's profitability is cross-selling products. Not as great for consumers. (laughs) The obvious example is Wells Fargo being pushed into creating fraudulent accounts. But it's also not great for consumers for another reason, which is that sometimes, consumers, if they're not very well educated, end up with accounts that they don't need, which can end up causing them to have to pay a lot in fees. 

Maxfield: Yeah, and you're just harassed anytime you interact with your bank. Wells Fargo customers, when you read about their experiences with Wells Fargo that have come out, they couldn't go into a bank without being cross-sold another product. When you're just going into cash a check, you just want to cash a check. You know what I mean? You don't want to sign up for, like a point you made earlier, a mortgage at the same time.

Lapera: Yeah. And then, the third thing that investors appreciate about banks is that some banks make it pretty hard to switch, which means you're way less likely to move your money out of the bank. That means they're going to have your money to make loans with or do whatever it is they're doing with your money. Good for investors, bad for consumers, because if switching costs are high, the rates are a lot less competitive between banks.

Maxfield: Yeah. It's good that the switching costs came right after cross-selling, those two are intimately intertwined. If you go to, let's say, Bank of America, and you have a brokerage account, an IRA, a checking account, a savings account, credit card with them, maybe you get your mortgage with them, and your car loan. Let's say you get those seven different products with them. Then, they do something, maybe some back-handed thing where they charge you too much for something, or do something that wasn't approved, what are you going to do? How long will that take, to switch all of those accounts? And then, to add to the complexity of that, let's say your paycheck, every couple weeks, is directly deposited into your account. And then, let's say you automatically pay things out of your account, so you would have to detach those things. So, the switching costs make it really hard for you to vote with your feet, if you will, if you're being mistreated by a particular bank. And on top of that, here's the great irony with the switching costs, Gaby, let's say you do want to switch to Wells Fargo -- you still need a big bank, because, like we were talking about before the show, maybe you travel a lot or something like that, so you want branches all over, a large ATM network. Who are you going to go to? Bank of America? With the things they've done over the past couple of decades? Or JPMorgan Chase, or Citigroup? They're all in the same boat in this regard.