

JPMorgan Sees Clients With Less Than $100,000 Unprofitable - krambs
http://www.bloomberg.com/news/2012-02-28/jpmorgan-views-clients-with-less-than-100-000-to-invest-as-unprofitable.html

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JumpCrisscross
There is a fair amount of regulatory posturing happening here; the Durbin
Amendment to Dodd-Frank, that regulates various consumer fees, is still being
written into implementation.

What is not being said is:

1\. We are in an abnormally low and compressed rate environment. As those
numbers go back up smaller deposits will become profitable.

2\. Small deposits turn into big deposits as customers age - this is the
rationale behind college checking accounts.

3\. The banking infrastructure is a largely fixed cost. I don't know how they
accounted to $100k, but I'd you wanted to inflate the number one could ignore
the fact that the variable cost of most customers is virtually non-existent at
the margin.

4\. You can just charge fees to customers below $100k to make them profitable.
Checking accounts are historically cheap, in real terms.

~~~
orijing
4\. is one of the points that's being addressed by the amendment you're
mentioning. In particular, it'll limit the fees that can be charged for things
like debit cards, checking accounts, etc--the fees that made unprofitable
customers profitable.

~~~
dman
What happens when its no longer economically rational to service clients with
small deposits - people forced to put money under their mattresses ?

~~~
adrianparsons
Maybe smaller online banks (Banksimple, ING Direct) pick up the slack? Without
physical branches to operate, maybe these kind of operations are more likely
to make money off of checking accounts.

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mathattack
It does make sense to me. How much do they make on small transactions and how
much does human intervention cost? These firms have tons of internal overhead
too.

A customer with 100mm is possibly only 10x as hard to serve as one with 100k.

I suspect the endgame is 100 pct automated services for most of the market.
This won't be provided by the big firms who struggle to get my credit card and
checking account on the same screen.

~~~
ahi
I can video chat with someone on the other side of the globe, but it takes
Megabank a couple days to "wire" (what the fuck does that even mean?) my money
to Hugebank a couple blocks away. I am sure we all have plenty examples of our
banks' inefficiency.

With fees and free money from the Fed, banks haven't felt any pressure to
improve their business processes. With congress kicking fees away from them,
they might have to learn how to not suck at their jobs.

~~~
JumpCrisscross
There is also a huge regulatory burden. There is still a lot of federal
infrastructure that requires "hard copies" or T+3, i.e. 3 days to settle
transactions. Innovation in commercial banking is very slow.

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dman
My first instinct was that 100k is a ridiculously high number, but then I
checked [http://www.treasury.gov/resource-center/data-chart-
center/in...](http://www.treasury.gov/resource-center/data-chart-
center/interest-rates/Pages/TextView.aspx?data=yield) \- rates for three year
treasuries are only 0.41%. That would yield ~ $410 not including significant
interest rate risk. Fun times.

~~~
3am
But consider that tier 1 capital ratios are on the order of 10%, so they're
leveraging the deposits many times over. Further, they're probably not
reinvesting the deposits in treasuries, but rather making commercial or
personal loans at more than 4% (minus what they pay out in interest on the
checking, which if it's anything like mine is more of an insult than an
incentive). So it would probably yield closer to $40K before taking into
account loan default risks and other costs.

The other post saying this is about the Durbin amendment to the Dodd-Frank
bill is probably much closer to the truth. You also have to take into account
(JPM-Chase's CEO) Jamie Dimon's extremely vocal position on the bill.

~~~
JumpCrisscross
As of FYE 2011 US banks with more than $1B in deposits had a net loans/leases
to total deposits ratio of 71% [1]. Tier 1 capital is less a measure of
leverage from a systemic level as it is of bank stability.

Your basic point, that we must account for leverage, is correct in its
assertion but not intensity. (No worries - there is no pride in having spent
years learning to pry apart financial institutions).

[1] <http://www2.fdic.gov/sdi/main.asp> (A&L)

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wtvanhest
I know the gut reaction is that it is unbelievable that someone with $50,000
isn't "worth" having as a customer, but there are 2 things to consider:

1) JPMorgan is saying that future regulation is what is driving those
customers to be unprofitable.

More importantly:

2) For someone making business decisions, it is important to really look at
your customers to determine which are profitable. There is a consistent flow
of stories from startup founders about the dangers of trying to satisfy every
customer.

This should be an example of a calculated way a company looks at their
profitability and customer mix responsibly and with careful analysis rather
than gut feel.

*As a caveat, we don't really know whether those customers would be unprofitable or not, and JPMorgan may be making a political statement about future regulation through their financial documents.

~~~
ahi
JPMorgan hasn't had to figure out how to make those customers profitable
because they've been able to load them up with fees. New regulations are
giving them the option of pushing customers away, or figuring out how to make
them profitable. Raise your hand if you think there's no efficiency gains to
be had in banking services? They have been through this before when credit
unions started offering free checking. Somehow they managed.

JPMorgan execs are saying they can't or won't adapt to the changing market.
"We're a dinosaur. Save us Washington! Save us!" This article is part of their
lobbying efforts. Entrepreneurs should see it as an opportunity.

~~~
gaius
_Save us Washington! Save us!_

But they are asking Washington to NOT do anything. This isn't a bailout.

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bickfordb
One thing I've been struggling to understand: unless you're using JPMorgan to
manage your money, why would you leave more than $5-10K in a bank
checking/savings account over a discount brokerage account (Fidelity,
Scottrade)?

~~~
rdl
Yeah, one of the best hacks I've found is to [ab]use a brokerage account for
general banking use. E-Trade, Fidelity, Schwab, etc. all give banking accounts
with very minimal (if any) minimum balance requirements, great policies
(E-Trade refunds all foreign ATM fees, unlimited number of times (at least
more than 200 or so times per month, which is the most I ever did), good money
market balances, etc. Their only weakness is no decent online wire sending
capability.

Basically, it's even better than a good credit union, because their brokerage
accounts are so high margin/high revenue that they'll subsidize the banking
operations. It's like a cheap hotel room at a Vegas casino -- a win if you
don't gamble.

~~~
Drbble
Taking them up on an offer is not abuse. They do fine (ab)using the money you
park with them.

~~~
rdl
As an underpaid startup founder, I keep a tiny balance with them, and run
large amounts of transactions through them (not transactions they earn fees
from); I'm a horribly unprofitable customer for them.

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mrj
These banks have grown incredibly large in part by leveraging fees for
otherwise "unprofitable" accounts. What they're saying is they can't maintain
their current size without the extra billions of income. They feel entitled to
that additional money.

Of course, from the outside it sounds just fine if they have to shrink to
match their actual deposits.

~~~
tsotha
What do you mean by "incredibly large"? Revenue? Market cap? Profit? And why
do you put quotes around the word "unprofitable"? If you have a buck fifty in
your account you're an unprofitable customer, no quotes needed, unless you
manage to overdraw your account on a regular basis.

Banks are not going to lose money on customers, with the narrow exception of
young people they want to develop a relationship with.

What will happen if the government doesn't allow high overdraft charges and
such is the banks will charge big monthly fees for the privilege of having an
account. If the government doesn't allow that they'll simply jettison people
without a lot of money.

~~~
ahi
The marginal cost for servicing an account should be roughly 0. There's no
reason accounts with 1.50 should be unprofitable if you have updated your tech
and business processes. Plenty of services survive with customer values in the
fractions of pennies.

~~~
tsotha
Well, sure, as long as that customer never uses the ATM, doesn't get paper
statements, and never talks to a teller. But how many customers are like that?

~~~
Drbble
These can be easily covered by legally allowed fees.

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gaius
We see this in the UK too, people getting upset about overdraft fees
pressuring politicians to change the rules. The thing is, I like overdraft
fees. I like this idea that the irresponsible fund free banking for the others
- one of the very few occasions in economic or political life that this
happens. The alternative is a monthly fee for everyone.

~~~
peteretep
Fining someone £30 for an 'overdraft' that they didn't want, because you've
explicitly set up the functionality to allow that to happen is predatory. The
idea that that 'funds' free banking for other people - rather than being money
gouging - is naive at best.

~~~
gaius
It is very easy to avoid these fees - don't spend money you don't have!

~~~
TylerE
Yes, that works great until some server you subscribe to has accidentally
charges you for some huge amount due to a bug on their end, which overdrafts
you, and you incur another overdraft for every transaction that posts on the
same day. Through no fault of your own.

~~~
gaius
There are means for recompense in this scenario. But this "server" is not one
of the bank's, is it? No way for them to tell that this isn't a legitimate
purchase that you have authorized.

~~~
TylerE
Well yes, but then, you're the one who's screwed, through no fault of your
own, and have fun talking to the bank getting them to reverse those fees.

This is not a hypothetical scenario - here's one recent event:
[http://www.tomshardware.com/news/Warhammer-Online-
MMORPG,101...](http://www.tomshardware.com/news/Warhammer-Online-
MMORPG,10142.html)

~~~
gaius
You keep saying it's not your fault, but it's not the bank's either: you gave
this third party your bank card and told 'em to charge whatever they wanted.
Caveat emptor.

~~~
Drbble
"caveat emptor" is the problem that civilization solves.

~~~
gaius
No, sorry, what? 1) he got a bank account knowing full well that it would
change a fee for going over an overdraft limit 2) he then gave an evidently
dodgy website authorization to change his account 3) 1 + 2 = free banking for
sensible people

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iterationx
Everytime a debit card is swiped they get a cut, so its hard to take this
seriously.

~~~
gaius
The new regulations mean that this revenue will be severely reduced.

