Thursday, June 17, 2010
Is The Business Model for Banking Viable?
I ask this question in the title because every where we turn we find that banks can't make enough money to sustain themselves. This has been true for a long time. Back in the 1980s, Citibank almost went under because they were paying out higher interest rates for money than they could lend. That was when they invented issuing credit cards and exporting interest rates across state lines to get around state usury laws. It saved the banking industry.
Even though they have difficulty making money, they open numerous branches with plush offices within a few miles of each other all across the country. The corporate offices are built out with only the highest quality materials and the furnishings are only the best and most expensive available. Bank salaries for management and executives is as good or better than at the most profitable corporations in the U.S., many times much better.
Yet, with all of this, we have a serious banking crisis throwing our economy for a loop. What is their solution? Not to cut back on their overhead at a fundamental level in their business model, but to find new ways to charge customers more for their services. BofA and other banks are now preparing to charge fees for basic checking services. This is also true of credit cards, as they start attaching annual fees to accounts. Every business deserves to make money, but only for value they provide. Banks are trying to make money using a seriously flawed business model. They need to start providing more value for what they provide, not just start charging their customers more. They need to cut back on their lavish offices and branch facilities and become better stewards of our money.
That is why I recommend moving all your accounts to a credit union. They are non-profit entities and are owned by their members. You aren't just an account holder, you are a member. You participate in the business of the credit union. Banks are trying to make way in congress to put greater burdens on Credit Unions because they are giving them tough competition, not by adding value, but by legislation that will cost consumers more. This is being done in the financial reform bill being considered in congress now. Write your congressman and representatives and stop this madness.