Hey Banks, Where’s the Profit?July 21, 2013 | By: Sean Murray
One of our favorite points of reference, a document from 1996 has finally been deleted from the www.frbsf.org website. We didn’t save the document but we’ve thankfully used this quote from it before:
There’s a large small business segment that needs and wants to borrow on a commercial basis, but their needs are very small. Business owners want $10,000, $20,000 or $30,000 loan–the average is somewhere around $25,000. Traditionally, that’s been a very unprofitable business for a bank.
– The Federal Reserve Bank of San Francisco
Now compare that with the results of a 2011 study that found banks lose money on customer checking accounts:
The average checking account cost banks $349 in 2011
The average revenue per account is just $268
This implies a loss of $81 a year
Source: Moebs Services via Bankrate.com
So a small business opens up a checking account and it may be causing the bank to lose money. So naturally a bank would lend that money out to turn a profit then right? Well, not so fast. Between the cost of processing a loan, servicing it, trying to collect on it, repossessing collateral (in some cases), and the potential loss on a default, lending isn’t such a good bet either, especially when there are legal caps on interest rates.
Folks in the alternative business lending industry have been saying for years that they are satisfying a role that banks will not fill. Banks do small business loans alright, but their sweet spot is a $1 million loan and above.
John Smith business owner who has banked with ABC community for 20 years may think that such strong loyalty warrants an approval for the $20,000 he seeks. What he doesn’t know is that the bank has been trying to get rid of him for 20 years.
In an article by the Motley Fool, Bank of America is described as a bank that has let their customers know exactly how they feel about loss inducing checking accounts. In 2012, they were ranked as the worst performing bank across the board for customer service.
It’s easy to point the finger at banks as money grubbing crooks every time they charge a bogus sounding fee, but many of those fees are keeping them afloat, very profitably afloat mind you, but still afloat.
My favorite fee that my own bank has come up with is a “teller interaction fee.” If I make a deposit or a withdrawal with a human teller instead of at an ATM, a fee is assessed.
I use the ATM every time. I’m guessing my bank would like me to pack up and leave… that is unless I’m looking to borrow a million bucks. God knows how much time that will take and how much paperwork they’re going to ask for though. I think I’d rather just apply for a merchant cash advance 😉July 21, 2013
Sean Murray is the founder of deBanked, an 11-year veteran of the merchant cash advance industry, a casual Lending Club and Prosper note investor, the co-founder of Daily Funder, an alternative lending speaker, consultant, writer, and enthusiast. Connect with me on LinkedIn or follow me on twitter.