Insights From A Bank Insider: Part 2

The Financial Blogger replies to Part 1. In his post, he begins by saying that banks should be held to the same low standards as other companies. I agree that banks and other companies should have standards, but I don't think that we should accept bottom-of-the-barrel standards.

I believe that banks should be very near the front for improving standards simply because they are so necessary and intimate. They are more like doctors than the grocery stores FB compares them to. Base financial products, or more properly, the entire financial infrastructure, are not vegetables. If I don't like someone's vegetables I get vegetables from someone else or even grow my own. Nobody can reasonably abstain from banks because they would not be able to participate in anything.

To be honest, I don't know why banks would not make progress in this area. When I do business at the bank it is clear that they are desperate for my business. The same bank that bullies me with rate increases on my line of credit throws discounts at me to sign up for a savings account. They are so astonishingly imperceptive that, even when told that my business goes elsewhere not because I don't get discounts but because I am hit with increases, they do not adjust their tactic.

My theory is that the bank is a very old school, non-progressive institution. They must have incentive problems throughout. If I had to guess, I think customer reps get measured and rewarded by the number of new accounts and the number of rate increases, but not by the number of accounts lost or the general performance of the bank. So they don't care how much business they lose. In fact, maybe it's even better for them because now they have a chance to win it back by offering a discount!

The next interesting point made by Financial Blogger was that the bank has to keep track of the transactions. This is very obvious. I just assume that this is something they've worked out and become good at over the centuries. Sadly, I even have stories about the bank not able to meet their most basic duty to keep proper records.

Finally, I was very happy that the conversation touched on the bank's ability to lend more than they have in cash. To me this is the ultimate cheat on the rest of the economy. I can't think of another business that is allowed to make money out of nothing! Here's how it works, as best as I understand it:

Someone slaves away and earns $100 cash at his or her job, which gets deposited at a bank earning maybe 2% on the high end. Now the bank has $100 of cash deposits that it can lend out, say at 7.5% on the low end (or 20+% for a credit card!). It's a decent profit margin of between 5.5 and 18%. The bank's righteous earnings for managing risk, bringing saver and borrower together, all that jazz. Here's the kicker:

That $100 is paid but almost certainly ends up as a deposit in a bank; perhaps the same bank. Now there is another $100 for a total of $200 deposited, but only $100 in cash because the bank got cash in, paid it out as a loan, then got it back as a deposit. So the bank now makes another loan! Still the same amount of cash, but the bank makes another 5.5 to 18%. Then, when the $100 comes back again there is another loan and another 5.5 to 18% and so on.

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To me that's incredible. It's equivalent to a realtor selling the same house multiple times hoping that the buyers never run into each other. Name another gig in the world where a business can charge for "product" it does not, nor will it ever, have. By the way, this gives the banking industry immense power in our economy because most of the money supply was created using just this method. That, in itself, is an excellent reason to hold banks to a very high standard of fairness and competence.

Some counter-examples:

Like The Financial Blogger, I too have seen some improvement over the years, but mostly not from the traditional banks. I come from Western Canada where we've had both President's Choice and ING Direct for a number of years. Both of these banks offer the customer excellent service at low cost relative to other banks. This is paradoxical because these banks are almost virtual in the sense that you rarely, if ever, see a real person. You typically do your business using the Internet, phone, or ATM. Interesting conclusions I'm making: They don't even give a branch to visit yet their service is far better.

Following the success of these banks I've seen changes in the products offered by traditional banks. High interest savings accounts become available, the banks start to offer a token account without monthly fees. I think this supports one of Financial Blogger's comments that competition is needed to break up the oligopoly. I don't think that banks could survive real competition for new business.

The Financial Blogger asked for some examples with loans and customer service. I'll give a brief history:

• I was with BMO since I was a kid. I had everything there as I grew up: first investment account, first RRSP, first mortgage, first RRSP loan, everything.
• Then they pissed me off somehow; to be honest I don't even remember how. They did something unfair like raise a fee or reduce a benefit to get some rinky-dink amount from me, so I threatened to move my stuff. They didn't flinch and neither did I.
• I closed out and moved all my bank accounts to President's Choice and have been nothing but happy for it. I also cancelled my junky BMO credit card and got the PC Mastercard and again, absolutely magnificent.
• When my mortgage came up for renewal I moved it to RBC. I can't say I've been happy with RBC since they've accomplished the impossible by proving themselves as incompetent as BMO.
• I opened up new investment accounts at Altamira and now have the majority of my investments there. I didn't move my investments from BMO because it would trigger a sale, which means capital gains, but I now have about 4 times as much capital outside BMO. Altamira is another superb financial company that I would recommend over any bank.
• I bought two investment properties and now have mortgages worth about 8 times as much as I had with BMO.

I don't think BMO is worse than other banks. So tell me, what would make them decide to try to snatch a few dollars to lose literally thousands or tens of thousands over a lifetime? They are not interested in building relationships but in simply taking me for a ride, and I find that insulting. It was a big effort to spread my finances to the wind but I'm happier and wealthier for it. RBC too will soon feel the loss when the mortgages come due. CIBC, which my wife uses, is just as terrible and they also will lose business.