If you're an investor in Bank of America (NYSE:BAC) and are even remotely curious about why the nation's second-largest bank by assets generates a fraction of the revenue that its better-heeled competitors squeeze from their respective client bases, then perhaps the latest news about how it uses and abuses its customers will help connect the dots.
Over the past few months, reports have been trickling out about lawsuits and investigations stemming from the way Bank of America and a handful of other banks have, in an apparent violation of federal bankruptcy laws, allegedly refused to discharge the debts of bankrupt borrowers long after a court has ordered creditors to do so.
According to The New York Times:
The lawsuits accuse the banks of engineering what amounts to a subtle but ruthless debt collection tactic, effectively holding borrowers' credit reports hostage, refusing to fix the mistakes unless people pay money for debts that they do not actually owe.
While these are merely allegations at this point, it wouldn't be the first time Bank of America has pulled the wool over courts' eyes. In the aftermath of the financial crisis, it made a habit of submitting forged documents in judicial foreclosure proceedings to expedite the eviction of homeowners -- many of whom, it seems safe to assume, were force-fed their mortgages in the first place by overaggressive lending officers at Countrywide Financial, which the bank acquired in 2008. Bank of America paid dearly for the intransigence, entering into the so-called National Mortgage Settlement that cost the company nearly $12 billion between fines and relief to borrowers.
It also wouldn't be the first time that Bank of America has acted in a way that leads one to wonder how the bank perceives its customers -- that is, as clients or adversaries. Prior to the financial crisis, it surreptitiously reordered customers' debit card transactions for the purpose of maximizing overdraft fees. Let's say, for instance, that a customer had a total of $20 in their checking account. If this person had five $2 transactions on a particular morning and one $100 transaction in the evening, the bank would debit the $100 transaction first, causing all six of the transactions to incur overdraft fees as opposed to just the last one. At the beginning of 2011, Bank of America paid $410 million to settle these charges.
Bank of America has also settled lawsuits over the past few years stemming from allegations that it rigged ostensibly neutral credit card arbitration proceeds against its customers. "Often without knowing it, individuals agree in the fine print of their credit card applications to arbitrate any disputes over bills rather than have the cases go to court," explained the Bloomberg article that first brought national attention to the issue. "What consumers also don't know is that [the firm] which dominates credit card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail."
The point is that -- and, trust me, I could go on with similar examples -- Bank of America has constructed a business model predicated on cross-selling its vast array of products from one division (say, consumer banking) to another (say, wealth management). And cross-selling requires at least some level of trust and respect on the part of customers. If Bank of America can't establish this, then it will never be able to compete in the proverbial big leagues against the likes of Wells Fargo and U.S. Bancorp, the two most profitable big banks in the country.