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23 years of losses as marketing
Customers who lose money
Many businesses sell a few loss-leaders, but banking is unusual in that the median customer earns zero or even negative dollars. A typical customer keeps about $1,300 in checking, clogs up the ATM line twice a month on payday, and never applies for a mortgage.
An average account generates about $107 a year in service and overdraft fees. By some estimates, servicing a typical customer costs between $250 and $400 a year.
Fixed costs
Banks stay in the game because most of their costs are fixed. Real estate and staffing cost much the same at 3,100 accounts as at 3,200, so the median account is not profitable but is at least not super unprofitable.
A long game
Banking is also a long-term, relationship-driven business. Most people hate thinking about banks, so they hate switching them, and there's a decent chance a first bank is also the last. The average branch accumulates half of the deposits it will ever have in its first three years, after which it is mostly about keeping existing customers happy.
If a customer who lost money for 23 years applies for a mortgage in year 24, it may all have been worthwhile. Banks also need their community's trust and goodwill while cutting costs, and sponsoring the local little league team and serving everyone, including the very young and unprofitable, are two affordable ways to do both.
Why is switching banks so rare?
Economists call the time and risk of changing providers a switching cost. For a bank account, that means rerouting paychecks, bill payments, and linked services, and a missed payment can carry a fee or a late penalty. Markets with high switching costs reward companies that win customers early and keep them. Banks have long offered student accounts and opened campus branches.
Why do banks sponsor local teams?
Community trust is a legal matter as well as a commercial one for American banks. The Community Reinvestment Act of 1977 requires federal regulators to evaluate how well each bank meets the credit needs of the communities where it takes deposits. Examiners look at lending, investments, and services within a bank's local area. A bank with a poor rating can have its expansion or merger applications held up.
Why is a mortgage such a big prize?
A mortgage is usually the largest loan a household takes, and it can run for thirty years, so a single loan produces interest income for decades. Lenders also earn origination fees, and the right to collect payments, called servicing, can be sold separately from the loan. The thirty-year fixed-rate mortgage became the American standard only after the New Deal. Before the 1930s, most home loans lasted five to ten years and ended in a large balloon payment.
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