What is Your Bank Worth To You?

Mike Konczal, bank-blogger extraordinaire, has a piece titled "What Are You Worth to Your Bank?" that I find sort of puzzling.

Here's the answer that Konczal comes up with, after some head scratching:

But anyway, we went out for drinks and it quickly got crazy and financial equations were being written down on napkins. The question at hand was, "How much is a customer worth to a commercial bank?" This is what we came up with:

There's whatever you pay in fees. Whatever you having in your checking and savings account is lent out, and the spread is going to be at least 2.5 percent, so they make a ballpark 2.5 percent off whatever you keep in your accounts. And whenever you pay with a credit card or a debit card, your bank is making at least 1.7 percent of the transaction, paid for by the merchant.

So let's assume there's this family. Let's say they make $60,000/year, so they take home about $3,500 a month after taxes. They don't live month to month, but they certainly live quarter-to-quarter, and they keep three months worth of money in their checking and savings account, so about $10,500 through the year. Let's also say that they spend half their money on essentials. Two-thirds of the remaining budget, goes through a credit card or a debit card when it is spent, so they put $1,155 through a card in a month. They are very clever and somehow manage to dodge all fees.

How much are they worth as a customer? A quick check tells us: $498.12.

Maybe you can relate to this budget. So here's a good question: Do you feel you get half a grand worth of service from your bank?

This doesn't make much sense to me.  For starters, it assumes that you do not cost your bank anything, which is not likely to be true.  They have to spend money clearing your checks.  They need a customer service agent to deal with you.  Probably you enjoy having branches and ATMs available.  You use computer time and bandwith for your online banking.  Your withdrawals and deposits must be recorded and audited.  Insurance must be paid to the FDIC, and regulators complied with. And so forth.

Now, obviously, many of these things have threshhold effects--you can add one additional customer without adding branches or customer service agent.  But there is a marginal cost to providing services to you, which means that $498.12 is not what you are "worth" to your bank; it is, in theory, the revenue you provide them.  But when I look at bank income statements, it seems like the top line differs rather dramatically from the bottom line.  And my understanding is that customers with moderate balances aren't all that lucrative for banks--which is why they don't particularly encourage low-income customers to sign up for their services.

Conversely, Konczal implies that leaving your money with your bank is somehow costing you almost $500 a year.  But that would only be true if you, yourself, could go out and get a better riskless return on your money, which you can't.  Especially not if you want the right to pull all your money out at a moment's notice.  Your alternative to the bank, if you want guaranteed principal return and perfect liquidity, is sticking the stuff under your mattress.  And while it may be gratifying to know that the mattress doesn't really get much out of the transaction, it also won't pay you any interest at all--not even the pitiful percentage I get from Citibank.

Konczal has done a lot of good work on the scuzzy ways that banks maximize things like overdraft fees.  But I don't think that this is the right way to look at checking account pricing.