Maxine Waters, California’s liberal and controversial House Representative, recently referred to the major U.S. banks as ‘gangsters’. Glenn Beck swiftly picked up on these comments during his Thursday (9/1) broadcast adding there is certainly ‘thuggery’ and ‘gangsterism’ in our banking system. Of course, he fell short on agreeing with Representative Waters on many other points. Nonetheless, Waters and Beck are both trending on what is prevalent in the minds of most Americans today – the perception that U.S. banks are evil.
Perhaps evil is harsh. Let’s just say they are misguided.
However, before we condemn banking in general, it’s important to understand that banks were never intended to be not-for-profits. These institutions have owners and investors who want to produce earnings from normal banking business practices. Like the corner market or commercial warehouse, they either turn a profit and thrive or lose money and fold. It’s that simple.
So how does that bank make money from you, the consumer? Consider these practical truths:
The bank wants you in debt
This may be obvious, but he bank wants you to borrow as much money as possible. More and larger loans mean superior margins and greater value to the institution as their customer.
Opening new household checking accounts is a boon
Have you ever attempted to cash a check at the bank it was issued but where you did not have a banking relationship? Odds are you were offered the choice of paying $10 (approximately) to cash the check or to open an account and cash the check for free. Either way, the bank makes money. Statistically, the more checking accounts a bank has (especially in low income areas) the more bounced check fees they can collect. No one will tell you that when pressured into opening a new checking relationship but it is a fact.
Getting you to an investment counselor is pure profit
In most cases, investment counselors at your local brick and mortar bank are not paid a salary. They may have a draw, but they aren’t compensated in the same manner as the other employees. In other words, they are hungry. They eat what they kill. The beauty of this relationship is the bank has limited financial stake in that representative. Plus, the fees charged by bank investment counselors are amongst the highest in the investments industry. Working with a bank rep, especially one without a conscious, can be extremely costly.
Establishing a relationship with a ‘private banker’ solidifies you as a cash cow
Once identified as a profitable client, the bank may introduce you to a private banker or relationship manager. This is the really nice person who gets you cookies and coffee, asks all about the kids, and roots for you having a long and happy retirement. The small talk may seem nice, but what’s actually happening is this person (remember – he/she is a paid bank employee) is gathering as much information about you as possible. The private banker’s sole existence is based on getting the consumer to purchase as many products as possible. They are usually under enormous stress from the loan department, wealth management, investment counselor, consumer lenders, and any other group in the bank that relies on your ability to borrow or invest.
The bank wants you to buy a house….a really big house
Talking about pressure, the mortgage representative is probably the most stressed individual at your bank. They live and die by housing sales and the degree to which the local market is robust. The size of the mortgage matters as well. You don’t need to be a genius to know the commission on a $200k mortgage would be considerably less than a $500k mortgage. Once that mortgage is your responsibility whether you can pay it or not is your problem.
Perhaps Waters and Beck have it right. The banks are all too willing to take advantage of situations where people are naive or lack some common sense. The words ‘thuggery’ and ‘gangsterism’ are a bit harsh, though.
Let’s just say when it comes to dealing with a bank, may the buyer beware.