Tim Worstall

Zoe Williams and Business.

Zoe Williams manages to reveal (again?) that she doesn’t actually know how business works at all.

And yet we should be
exercised about it; it is a given that the poorer the area, the more
that a bank will be taking in charges (it’s comparatively cheap,
bank-wise, to live well within your salary – getting letters about how
obnoxiously poor you are is rather costly). Likewise, people in a poor
borough will spend more in McDonald’s, and more time in a post office,
than in an affluent area.

Logically,
then, since there is a variation in the quality of bank branches, the
very best of them should be located in the sort of areas where people
have to spend the most time in a branch. These should be the flagships
of a bank; they should have the plasma tellies and the free tea. Since,
conversely, atrocious service is without exception the rule across all
the facilities in a poor area, you cannot help but think that this
state of affairs is not an accident, that it is in fact a policy, an
industry standard.

Her analysis, that the poor get screwed by banks because they have the shabby branches while they provide lots of those lovely charges, seems a little odd. Very odd in fact. For banks do not make their profits off those charges for sending you a letter telling you you are overdrawn. From a few years ago I remember a figure, that it costs 25 quid to actually send someone a letter. Yes, it’s all pretty much automated but someone has to decide (ie spend time they are paid for) to send it, it needs to be topped and tailed, printed out (computer systems are expensive and have to be paid for) and mailed off. Then someone has to be paid to wait for the phone call to discuss it, of course. All takes time so it all takes money.

Banks, rather, make their money by borrowing it from people’s savings at one interest rate and then lending it to other people at higher interest rates. The more money that goes through the system (other things being equal), the more they make. So you would expect branches in poor areas to be less well appointed as, umm, poor people have less money to shovel through either end of that system, either to borrow or to lend.

Well done Zoe, an article built on a fallacy, a misunderstanding of how the world works.

In

4 responses

  1. pete Avatar
    pete

    Zoe is writing for a readership that has no idea of having to make money to stay in business and in a job. The employer of the Guardian’s readership, the government, is never going to go out of business is it?

    Reply
  2. dsquared Avatar
    dsquared

    I think you remember this from the last time the TSC had hearings on the subject and it was more or less laughed out of court then. The figure of £25 was arrived at by fully allocating the systems costs of monitoring accounts and running call centres (both of which the bank would need anyway) and allocating the huge sums the banks were spending at the time on CRM systems as if they were entirely to deal with unauthorised overdrafts. It’s certainly not a marginal cost figure and the amount of human involvement is less than you suggest. NSF fees and unauthorised overdraft fees are not the bedrock of banking profitability (in the UK; for quite a lot of smaller US banks they are a very material contributor), but they certainly aren’t run on a money losing basis.
    Tim adds: I think the figure was just a general one for the cost of writing a letter, not specific to the banks. But glad we agree on something to do with banks, that Zoe’s identification of their core profitability was wrong.

    Reply
  3. Timothy Avatar
    Timothy

    Dsquared is right about NSF and OD fees for smaller US banks. They can make up a pretty large portion of an income statement for anybody who’s regional rather than national. Banks in my employer’s peer-group tend to hoover around 50% of fee income from consumer OD/NSF fees. Consumer accounts, from what I know anyway, can be profitable in that respect, but they don’t too a lot for the balance sheet. Of course, I work on the commercial side of the bank, so the whole consumer world really only exists to me in systems data and the occasional quarterly financial statement.

    Reply
  4. Timothy Avatar
    Timothy

    Dsquared is right about NSF and OD fees for smaller US banks. They can make up a pretty large portion of an income statement for anybody who’s regional rather than national. Banks in my employer’s peer-group tend to hoover around 50% of fee income from consumer OD/NSF fees. Consumer accounts, from what I know anyway, can be profitable in that respect, but they don’t do a lot for the balance sheet. Of course, I work on the commercial side of the bank, so the whole consumer world really only exists to me in systems data and the occasional quarterly financial statement.

    Reply

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