Sorry, Banks: You Have No "Right" to Fleece Customers for Profit
It was just about a week ago that a strange fight broke out between President Obama and Bank of America CEO Brian Moynihan, Occupy Wall Street rumbling in the background. Bank of America had just announced its plans to charge customers a $5 monthly fee on debit cards. Obama hit back, warning the bank that it doesn’t “have some inherent right just to, you know, get a certain amount of profit if your customers are being mistreated.” Moynihan retaliated, saying, “we have a right to make a profit.”
Which one is right? While the rest of Moynihan’s statement is true — “I have an inherent duty as a CEO of a publicly owned company to get a return for my shareholders” — there is no inherent right to make a profit. Companies start and fail all the time. That’s one of the functions that bankruptcy serves. While CEOs have a legally binding duty to shareholders to turn as much profit as they can, the rest of us aren’t on the hook to help them do it.
But as it turns out, we are helping Bank of America do it. BoA, it’s true, is in a tough financial position lately. Its stock is down 53 percent for the year and it posted a loss of more than $9.1 billion in July. What’s dragging it down? Much of it has to do with its acquisition of mortgage company Countrywide Financial and the legal challenges it faces related to mortgage lending. In its filing in April, the bank showed a loss of $2.4 billion in the consumer real estate business.
Card users, it turns out, are one of the bright spots. The poor earnings reported in April were partially offset by “strong earnings from the credit card business,” the New York Times reported. That unit saw income rise by 77 percent. And in fact the bank beat analysts’ forecasts in July, earning $3.1 billion, and part of its success story was a return to profitability for its credit card business after losing about $1.6 billion last year. The company attributed this in part to fewer delinquencies — in fact, charge offs fell by $1.2 billion from the previous quarter. Overall, in its latest SEC filing, it reported that net income from the Global Card Services unit — which includes both credit cards and deposits as of March — is up 110 percent for the first half of the year as compared to 2010, from $1.8 billion to $3.8 billion. It’s up even higher looking at just the latest quarter: 146 percent. While it did report losing about $300 million related to new regulations, or the CARD Act, it seems to have made a pretty small dent. As Moynihan put it when it released its first quarter earnings, “Our customer-focused strategy is working well.” Sure is.
Banks overall aren’t faring too terribly in the aftermath of a recession they caused. Banks insured by the FDIC reported a profit of $29 billion in May, an almost 70 percent increase from the same quarter in 2010. It was the seventh consecutive quarter of year-over-year industry earnings gains. In the second quarter, profits were up at most other large banks, including Goldman Sachs, which more than doubled its profits.
So what of the charge that a cap on debit card interchange fees makes the cards less economic, leading to the need for monthly card fees? Bank of America’s debit card business, after all, is nearly $3 billion, and now that charges on each card transaction will be capped to 24 cents, those profits will likely take a hit. But it may help to visit the history of debit cards to understand their “cost.” As Lloyd Constantine wrote in an op-ed for the New York Times:
Debit cards were developed by banks as a replacement for paper checks. When a consumer pays with a debit card instead of a check, the bank saves money. In the 1980s, Visa calculated the savings at 55 cents to $1.60 per check. The savings is much higher today… [P]urchases made with a debit card didn’t involve a loan from the bank, posed very little fraud risk and were extravagantly profitable to banks because they eliminated the costs of processing and clearing checks.
Constantine recounts the case that lead to a $3.4 billion settlement to stores in 1996 due to the practice of “deceiving stores and forcing them to accept overpriced debit transactions” while the bank was actually saving money. They also had to reduce their interchange fees to 42 cents. While Bank of America doesn’t have some legally protected right to reap profits from consumers, it does have the obligation to follow court rulings that find it is deceiving customers and retailers. It also has a legal obligation to follow new rules set out by the CARD Act and Consumer Financial Protection Bureau looking out for the interests of working Americans. It can’t even blame its financial struggles on us. Bank of America’s stock and profits may be depressed from an ill-fated acquisition, but money from our use of credit cards is helping to keep it afloat. If it wants to pad its profits, it’ll have to turn elsewhere.