Thursday, June 17, 2010

Not subtle

I'm not even in the mood to bother with the subtleties of this stuff right now (Argentina's playing in a few minutes) so let me just lay it out quick.

More than half of all checking accounts are currently unprofitable, according to a report issued last month by Celent, a unit of Marsh & McLennan Cos. It costs most banks between $250 and $300 a year to maintain one of the roughly 200 million checking accounts, according to industry estimates.

What exactly is the definition of "unprofitable" here?  Because I thought banks borrowed money from me at low rates and then lent it out at higher rates.  And given that a checking account ain't worth a warm pitcher of spit, in terms of the rate the banks pays to borrow from me, I would think that they could at least keep my name next to a number in some database and maintain a website and still manage to make a spread on lending the stuff out again. 

Now, if it really costs $300 a year to maintain a checking account, and the average account has $1,000, then this clearly isn't going to work.  About the only place to make a 30% interest rate loan is India, and that will be for $7 at a time.  However, I'm wildly skeptical of this figure.  Some quick estimates suggest that Fiserv (one of the largest outsourced processors of these accounts) charges around $50 per account, and that's going to be a package deal including debit processing, etc ...  (Incidentally, this suggests that the WSJ is once again essentially a corporate marketing vehicle and not a news organization, a shift which the informed investor can potentially profit from).  I'm having trouble finding the average checking account balance, but BOA does disclose the average interest spread, which was 4% last year.  So we might guess that a $1,000 checking account is about break even for a bank, which makes sense given that the article cites this as the pain point.  Even that seems a bit expensive to me, given that maintaining a checking account should cost about $0.05 more than maintaining a gmail account at this point, and somehow Google manages to give this away to 150 million people all over the world. 

But I feel sure that the median US checking account has a balance substantially in excess of  $1,000.  Which means that the bank isn't running this whole system at a loss, and that this is really question, once again, of financial extortion.  That is what you should hear every time you read something like, "banks must replace lost revenue by raising fees".  Sometimes, you don't get to replace lost revenue.  Especially if your whole goddamn industry should shrink.  Somewhere along the way people keep forgetting that the success of any financial reform can be judged by how much smaller we make finance.  There's really very little way to finesse this issue.  Finance is an intermediary that grew to enormous proportions.  At the peak it was close to 40% of all corporate profits in America.  This just can't continue.  We can argue about which part of the industry needs to shrink.  Maybe it's trading and derivatives and not checking account fees.  But some revenue has to get lost and NOT get replaced -- getting smaller is how shrinking happens.

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