Bailout

Is the Huffington bank boycott a good idea?

By Felix Salmon

Martha White has a very odd column about Arianna Huffington’s attempted boycott of the big four banks. Her math is simple: the four banks have $209 billion between them in transaction deposits, and the average American bank account has $4,000 in it, which means that in order to reduce the deposit base by 5%, or $10.5 billion, a whopping 2.6 million Americans would need to go through the hassle of changing banks.

But White here is missing the point: bank profits don’t go up with the size of your bank account. Indeed, it’s the other way around: it’s the poorest customers, racking up habitual overdraft charges and the like, which account for the lion’s share of banks’ fees and profits. As White herself writes:

Banks make their money in a lot of ways, such as by collecting fees. For instance, banks are projected to collect $38.5 billion in overdraft fees this year, some 90 percent of which is paid by only 10 percent of the customer base. While the new opt-in requirement for overdraft protection will probably lower this number in the coming years, it’s safe to assume that banks will come up with other ways to extract their pound of flesh. A recent Bankrate study showed that fees for everything from out-of-network ATM usage to account maintenance rose in 2009.

If the people with modest-sized checking accounts started leaving the big four banks for community banks and credit unions, that fee income would fall much faster than the banks’ deposit bases. That’s where the pressure from this campaign would really be felt.

And besides, the total balances leaving the banks would be more than $4,000 per account. People keep relatively small amounts of money in their checking accounts because those accounts don’t pay interest — checking-account funds are better off just about anywhere else, whether you use them to pay down credit-card debt or just invest them in a CD. If customers closed all their credit cards, savings accounts, in-house brokerage accounts, and the like when they left the bank, the net effect would be multiplied enormously.

So I’m still a fan of the Huffington campaign. No, I don’t think it’s going to have much visible effect on the banks themselves. But with luck at least it will help consumers realize how much of their earnings are being pocketed by these enormous bailed-out institutions — and help nudge them in a direction which will improve their own personal finances, even if it doesn’t make an enormous dent in the big banks’ P&L.

Full post as published by Macroprudential on January 05, 2010 (boomark / email).