Who needs who? October 19, 2009
Posted by nichebanking in Niche banking, Problems with traditional banking.trackback
Have you ever noticed the incredibly different tone and dynamic between a bank or credit union’s deposit-oriented relationships, and lending-side relationships? In a nutshell, here’s how it goes:
Deposit Relationship: The bank/credit union needs the deposits badly, but has absolutely no value proposition to help it win. Plus, the customer can go anywhere and get basically the exact same product. So the bank is desparate to get whatever deposit dollars it can get. In other words, the bank needs the customer worse than the customer needs the bank. Keep in mind deposits cost the bank money.
Lending/Borrowing Relationship: The bank/credit union needs to generate revenue, which it does by lending. The customer can turn to many different sources to borrow their money. The bank’s message and tone is “we’ll see if you can qualify to borrow money from us, and if you do, we might do you a favor and lend the money to you–consider yourself lucky.” The dynamic of the relationship is such that the customer feels lucky to be granted the blessing of borrowing money from this bank. In other words, lending is how the bank makes money, but the bank acts like the customer needs them worse than the bank needs the customer.
So to sum up, in the arena where the bank really needs to earn business so that it can make money (lending), it makes customers feel like they are lucky to even be considered for a loan. They might as well put a sign on the door that says “Welcome–just a reminder that you bank here because we let you be so lucky.”
Is this ass backwards or what?
This dynamic is interesting and odd–and quite different than what happens in other industries. For instance, if I walk into a car dealership with $25k in my pocket and want a Honda Accord, I feel like I have the leverage. I’m the one with the money, they’re the ones starving for a sale, and I can get the exact same product at a dealership down the street. And I’m not afraid to let them know that I have the leverage, and if they want my business they have to earn it.
This is not the case in banking, though…for some reason. In the future follow-up posts (Parts 2-?), we’ll examine why this is the case, and most importantly, how a niche banking model changes and improves this dynamic.
And hopefully lots more. Please add your comments and ideas to the discussion.
How do deposits cost the bank money? This is a new concept to me. If, as a depositor, I go into a bank, open an account, and deposit $10,000 they have access to those new funds and can use them to make more money. If they can’t do that they aren’t a very good bank are they?
What do I not understand in this equation?
I’m not a bank CFO so I can’t speak to all the dirty details, but here’s the banking 101 premise: on a bank’s balance sheet, deposits are liabilities. They cost the bank money because the bank has to “buy” them from the customer by paying the customer interest. In contrast, loans are assets because they make the bank money. Sure there are some free checking accounts that banks don’t pay interest on, but for the most part a bank has to buy money from depositors so that it can resell it to borrowers. The difference in the interest rates between the price of buying the money and selling the money is the spread, and that’s the bank’s margin.