Bold statement alert! Bank of America (BAC 0.14%) may have the best business model in the world right now.
Unfortunately for Bank of America shareholders, just having the best business model in theory doesn't guarantee operational or financial success. B of A's master plan isn't relatively new, but leadership blunders and lack of communication across the company have prevented the bank from fulfilling its true potential.
So, what is this mind-blowing, revolutionary strategy? In the words of CEO Brian Moynihan at a recent Goldman Sachs conference, "We're pursuing the customer relationship model."
In a perfect world
The collection of businesses and services under the B of A umbrella is virtually unmatched. Let's highlight the power of the bank's franchise with the life story of "Tommy" and how he could become every Bank of America shareholder's dream customer.
Ten years ago, Tommy was born.
Today, young Tommy's parents take him to the local Bank of America branch and put $100 into a deposit account and $200 into a savings account for Tommy. At this point, out 10-year-old is an extremely unprofitable customer for the bank and will be for the next several years -- but the seed has been planted.
At age 15, Tommy has a part-time job and begins to use his B of A debit card. Each time Tommy swipes that card, Bank of America receives revenue in the form of interchange fees. Despite now having $2,000 in his combined accounts, Tommy is still unprofitable to the bank.
At age 18, before he leaves for college and to start building his credit, Tommy acquires a Bank of America credit card. The bank now earns swipe fees on all of these transactions. Tommy manages all of these basic banking relationships on his iPhone 13.
At this point, B of A shareholders aren't thrilled to have Tommy at the bank. Given his relatively low account balance, the bank doesn't see the benefit of his balance on the lending side of the business, and it costs money to service his products. However, the seed has begun to poke its head out of the ground.
After college, Tommy goes to work on Wall Street at JPMorgan Chase. He begins to earn more, and his savings account grows to $65,000. Tommy is savvy with his money and opens an investment account via Merrill Edge, B of A's retail-focused brokerage.
After a few years of working, investing, and saving, Tommy is now married and wants to settle down in the New York suburbs and buy a house. He needs a mortgage, and he meets with his local B of A mortgage lender to commence the dealing. After issuing Tommy's mortgage, B of A sells that loan to one of the GSEs (assuming they're still around in 2030.) for a gain and retains the value of the servicing rights.
Taking it to the next level
Feeling burned out by Wall Street, Tommy decides to explore his entrepreneurial side and start a small business. Happy with this other B of A services, Tommy takes out a loan from the bank and manages his payroll and cash flow via B of A's online tools and technology.
Tommy is now becoming a very profitable customer for the bank because of his various revenue streams to the bank and minimal expense base.
Tommy's business continues to grow, and his needs become more complex. He now uses foreign suppliers and needs help managing his FX payments and supply-chain management -- Bank of America continues to meet his needs, a service for which he gladly forks over a fee.
Now at age 45, Thomas (he now prefers "Thomas" over "Tommy") has grown his business and generates over $500 million in annual sales. He wants to expand, but he needs capital. Thomas decides to take his company public. Enter Bank of America's investment-banking team -- this where the fees really start to roll in.
Armed with one of the largest investment-banking arms in the world, B of A provides Thomas with the expertise that allows him to get the most out his IPO.
With his business thriving, Thomas' business continues to hold cash balances in excess of $500 million with B of A -- allowing the bank to lend that cash out elsewhere. In addition to his business, Thomas is also flush with personal wealth and now uses an established Merrill Lynch financial advisor (more fees).
After years of expansion and using Bank of America's markets and banking services, Thomas is ready to sell his empire. Again, given his prior relationships and satisfaction in the past, he uses B of A's investment-banking team to get the best sale price.
After the sale, Thomas is a multimillionaire and requires highly specialized, personalized service. Enter B of A's U.S. Trust unit – the area of the bank dedicated to individuals with ultra-high net worth.
At this point, Thomas is 70 years old and has used only one financial institution for all of his financial needs.
Great on paper -- can it deliver?
The Bank of America business model can become an unparalleled profit engine, but only if management can facilitate communication across its business lines and make an organization of roughly 267,000 employees feel like one of only 267. The entire strategy hinges on providing customer satisfaction, something the bank has notoriously struggled to do.
Brian Moynihan and his current management team won't be around forever, but they must begin to set the tone for that will determine how customers and clients view the megabank. If the bank can shed its legacy issues and focus on profitably pleasing its droves of customers, in 10 years from today, fewer people will be scoffing at the financial behemoth and more will be saying what Warren Buffett said after making his B of A investment in 2011:
"I am impressed with the profit-generating abilities of this franchise."