Bank of America Nearly Destroys Their Business Model

Bank of America may have committed the #1 business model blunder of 2011 for their $5 debit card fee.

First, let’s get some background. Spoiled U.S. banks have become so addicted to high-profit fees that they seem to have forgotten the customer. The average bank earns over forty percent of its profit from fees. These include, swipe fees, account fees, loan fees, statement fees, overdraft fees, balance fees, and more. Prior to Wall Street reform, banks averaged $0.44 per debit card swipe. Banks are now capped at $0.24 per swipe. According to The Nilson Report, banks took in $48 billion from these fees before the reform. Assuming the banks did not get tricky and add peripheral fees, this still translates to $26 billion in swipe fees.

In the old days, the banks’ business model required them to:

1. Provide free checking accounts.
2. Handle lots of cash, coin counting etc instead of electronic money.
3. Process billions and billions of checks by hand. (In fact, I personally know of a check processing center for a large bank that employed 250+ people for 24/7/365 solely to enter check amounts and account numbers into their system. Electronic commerce has made this center nearly obsolete.)
4. Charge the customer $0 for writing a check.
5. Have human tellers wait on you instead of ATMs and the internet.

It seems to me that banks have successfully leveraged technology to eliminate tellers, check processors, branch costs, and more. In one of the most brilliant business model moves ever, banks have not only lowered their costs through technology, but they have charged EXTRA to the users of the cost-lowering technology.

 Banks used to let consumers write a check at Wal-Mart, spend tons of money processing the check by hand; send the physical check back to the consumer; keep a scan of the check for years; and generally have a painful and expensive process. Debit cards dramatically lowered the cost of the bank’s business model. It seems that the banks should be paying the merchants and card holders to use debit cards, not charging for them. Forget consumers revolting and changing to a credit union, what if Americans revolted against the banks and started writing checks again?

However, none of these factors stopped Bank of America from trying to add a $5 per month debit card fee. Technically, Bank of America did not try to change the business model. Bank of America was simply trying to preserve the existing business model with complete disregard for the customer’s hot buttons. Customer reaction to the fee was swift. There were protests, petitions, and even a National Bank Transfer Day. As a result, many other big banks cancelled plans to institute a similar debit fee.

In fairness to the banks, it costs an estimated $350 annually to maintain a consumer checking account each year. This is according to Chase’s Jamie Dimon. This covers services such as a 24-hour call center, anti-fraud protection, ATMs and online bill pay, he said.

Let’s also include Washington in on this mess. The new law effectively transferred an estimated $16 billion from banks to retailers by forcing the swipe fee lower. Now the banks are scrambling to replace the revenue. In this game of financial musical chairs, the consumer has ended up becoming the only one without a chair. It would seem that this debate would have been better left to the free market. Wal-Mart has plenty of leverage on Citibank and vice versa. What is an average consumer to do for leverage against a bank or retailer?

So what are the business model lessons learned from this fiasco for both banks and non-banks?

The Lesson

Understand your customer’s hot buttons and understand when you have had a windfall. As technology rapidly changed banking, a rare window of opportunity opened for institutions to not only lower expenses, but charge for the enhanced service level which this technology provided. However, this window is now closing or closed. Banking technology is ubiquitous and expected. Banks will need to find other methods to cover the ever-increasing cost of checking accounts without starting a customer revolt.

What do you think Bank of America should have done differently?