Wednesday, February 22, 2012

Are the Big Banks Actually Parasites?

On Quirks & Quarks this afternoon the host presented an interesting story on the ability of fruit flies to reduce the parasitic load of certain wasps by eating alcohol from fermenting fruit, which caused the wasp larvae to explode. Parasites have evolved in lockstep with their hosts, with the parasites needing to feed off their hosts and the hosts wanting to shed their unwelcome guests. And it is always a delicate dance, as the parasites want to extract the maximum resources from their hosts without actually killing the hosts, and the hosts want to reduce their resource losses so as to get on with the life business of feeding, growing and reproducing. It is a careful and complicated thing.

In many ways, these issues are the essence of my relationship with my bank. My bank provides some very useful services to me, and I am happy to pay for those services. But the bank also would like to draw additional resources from me, just because it can. This very week I received notice that the cost of my safe deposit box is going up about 50%, and I also received notice that the minimum monthly fee for accepting Visa payments at my shop is rising from $25 to almost $50. This from Canada's largest bank with the greatest profits ever, this year.

There was a time when banking was an honourable profession. In the very early years of the 20th century my grandfather joined the Bank of Montreal as a junior, or clerk. He was about 18 and had graduated high school, and he had few good choices for career except enlisting in the military, becoming a teacher, or joining the bank. There was no money for college, so those were his second best choices. It was called joining the bank in those days. There were no women employed there. One could not marry without the permission of the manager. Young men expected to work hard at bookkeeping and accounts and handling cash and lending money, and they would eventually be rewarded with the post of manager of their own branch. This was no small thing in those days: in the 1920's and 30's my grandfather moved in a rarefied social circle in the small towns where he was posted. His friends were the doctor and the minister and the schoolteacher. The pay was never very good but the explicit promise was that the pension would be good, so that when a man retired he could live well in the small community he retired in. This worked for my grandfather until my grandmother developed cancer and he had to go back to work as a bookkeeper at a car dealership to pay for his wife's care. These were in the days before modern socialised medicine.


(The image above is of my grandfather's bank branch, although it's a newer building, and next door to where his branch stood. That's me, about 100 years later.)

I joined a bank also, after high school. There were women working there (never as managers) and we still kept the books by hand (using honking great mechanical posting machines to keep the ledgers cards up-to-date). Computers and desktop calculators came after my time - we still calculated interest owing and paid using books of tables. And the Manager still had power to make loans and deal with his customers and set his standards, and as long as it was working out for him, head office did not interfere much. The manager was an important man in the business community. And he was usually his own man.

In those days the manager would often be entitled to profit-sharing if his branch performed well. We did a complicated calculation wherein the branch loaned its deposits to head office and borrowed the monies it loaned out, and from the margins on those transactions we deducted the occupancy costs, personnel costs, loan losses and other expenses, and if the branch was within budget and made a profit then the manager would have a small share in it. As the manager wasn't paid very well the profit share was no small thing.

The manager's profit-share was generated through good management. He kept his staff turnover low and his casual staff costs in check, he attracted deposits through his presence in the community, and he loaned the bank's money prudently and not recklessly, accepting that there would always be loan losses (or you weren't lending out enough).

At some point this changed, and I think that it changed when senior management began to be awarded bonuses based not on good management but on return-to-shareholders. This followed on the heels of centralised computerised bookkeeping where many of the clerical tasks formerly performed at the branch level were done at the central office level. New information technologies meant that loan requests could be funneled to a call centre and if the appropriate score was achieved on the application, the loan could be made. Managerial assessment and discretion were no longer needed. Staff no longer maintained records or vetted cheques, and as many customers as possible were transferred to the bank machine where expensive staff time was not required.

So the value of me, the customer, was reduced to that of a revenue stream. The local manager previously received a profit-share, but it was a share of his own making and doing. Now that the share to management was calculated on an enterprise-wide basis, it could be more widely distributed. Head office staff that had little influence on the workings of the bank came to receive multi-million dollar bonuses, and the management of the bank as a whole ceased to be for the benefit of the shareholders and came to be for the benefit of senior management. And any small fee that could be assessed on all of the bank's customers could generate millions in additional profits to be shared. And so it was.

I keep the books for the local cemetery. We keep about $8,000 on deposit and we write about 25 cheques per year. We never bother the teller and use the bank machine exclusively. But because we need a passbook so the books can be audited, we pay $2.25 per month as a "passbook fee". We earn less than a dollar per month in interest on our $8,000. Can you imagine how many millions of dollars that one little fee generates every year for bank management?

Every month when I open my Visa statement I see all of the little fees that the bank can charge to build their bonus pool. Visa authorisation fees, credit check fees, fees for each class of card. If you use a card with Air Miles or cashback points at my shop, I pay directly and immediately for your benefits. Some of these are small fees, less than 1%, but they add up to a significant cost to me, and a windfall for the bank.

The big one is coming soon. Right now, merchants pay a flat fee for an Interac transaction, typically about $.15. For credit card transactions we pay a percentage of the amount, but for Interac we pay a flat fee. In the USA the banks now issue Visa-branded debit cards, which are still linked to the customer's bank account but can also be linked to the credit account. And the fee for those is the same 2% to 3%. How's that for a nice boost to the bonus pool? There isn't even an additional cost in servicing the account. Ka-ching! Money in the Chairman's bonus pool!

I end up wondering when the Chairman of the bank turned to the dark side? I am sure that when he went to work for the bank it was not his express career wish to assist with the exploitation of the bank's customers so as to extract the greatest possible fees from them. I like to think that at one point these guys actually understood the necessary role that banks play in the economy, and I like to think that they knew and accepted that they were a part of the real and actual economy, where companies made things and businesses provided services to businesses and consumers purchased these goods and services and the entire economic circle was facilitated and expedited by the banks, who charged a modest portion of the economic activity as their fair share.

I suspect that part of the change occurred when the banks ceased to see themselves as part of a community. There was a time when most of the staff lived in town and owned houses there and sat on school boards and helped with the Boy Scouts and maybe even went to church. There used to be a larger management component in these branches, with accountants and assistant accountants and savings account managers who all lived and worked in the community. Many of those responsibilities have moved to a central processing facility and many of the staff are part-timers who get only 25 to 30 hours of work per week. It used to be that banks would advertise to their employees as well as to their customers, to set the image of the bank and to provide the expectations that customers would expect and staff would deliver. I don't see that now. And so customers became a revenue stream, and we became the host for the parasitic bankers and their bonus pools.

I doubt that my grandfather would recognise the banks anymore.

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