Banks Suck

Economics, Politics by Adam on 2008-02-01 09:56

Banks suck. I roar these words in frustration at least a few times a year, and you might, too. The reason is not hard to guess: banking is an industry subject to heavy regulation, and such industries tend to be very poor at meeting customer needs. (Other examples include health insurance and air travel.)

Banks make most of their money on consumer checking accounts through two mechanisms:

Both of these mechanisms for making money put their incentives in direct opposition to that of their customers. It’s in the bank’s interest for you to bounce checks, because those fees are a major source of revenue. So giving you tools to make it easier to know what your balance will be on a given day, for example, would actually hurt their revenue.

Float is even worse. I can’t count the number of times I’ve been nailed by this. I deposit a check or even make an electronic transfer a week or two in advance, thinking that will be enough time. Then an intervening holiday (which aren’t counted as “business days” and thus don’t count in the float; but don’t think that this prevents the bank from making interest on it in the meantime) fucks things up, and delays the funds until after I actually need them. Funny how banks take off more days than any other kind of business. Actually, it isn’t at all when you realize that every day they take off is extra interest revenue for them, but very little lost in the way of upset customers. I don’t think anyone has ever switched banks from being annoyed that theirs was closed on a critical day they needed to access their funds.

Online banks seems to be slightly better - I’ve used E*Trade for a few years, and there’s also ING Direct and EverBank. (Some discussion about online banks.) But these are only marginally better.

Even without knowing the details of banking industry regulation, you can tell quite easily that this is a heavily regulated market by the lack of variety in the options available. Almost every bank offers the exact same packages with the same features. Where’s the bank that is open 24 hours, or the one that is only open two days a week? Where’s the bank that charges you $100/month for their checking account, but then never charges you any other kind of fee? Where’s the bank that has no fees whatsoever, but then has a 30 day float on all deposits? A free market offers diverse options, because many people have different needs. A market in a regulatory chokehold, however, does not produce products and services that reflect the varying needs of a diverse population.

So wait - if banking regulation doesn’t benefit consumers, who does it benefit? You don’t have to think hard on this: existing banks are the winners. High regulation means they are unlikely to be challenged by companies with fresh ideas. Bank of America doesn’t have to worry that they’ll be replaced by a scrappy up-and-comer with better products, the way that Microsoft has to worry about Google, or Budweiser has to worry about microbrews.

One comment per 'Banks Suck'

  1. Bank of Antarctica says:

    I think that banks offer the options that they do because they serve the needs of the most people. Your ideas are interesting, but I think that in the end banks decide whether or not to offer a service based upon demand for that service.

    If there is not enough market demand for being able to do banking at 2AM, they will not offer that service as it would not make a profit.

    In the cases that you mentioned, it would seem that lack of demand, rather than regulation that has a bigger impact in determining what services a bank will offer.

    As far as banking regulation goes, it tends to address issues such as how much reserves a bank must carry in order to offer a loan, etc.

    Consumer checking accounts are not the big business for banks. Providing loans is.

    I used to hate banks for their dirty tricks until I stopped overdrawing my account. Now its a non-issue.

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