It seems to me that the older I get the more my memory pops up with stuff I hadn’t thought of in years. For example, I can recall how, when I was a youngster, bankers were depicted as “fat cats” having big luxury cars, living in mansions, smoking expensive cigars, and generally enjoying a life of ease while ordinary folks struggled to make ends meet.
I suppose these memories were triggered by the recent stories of how an executive of one of this country’s major banks recently retired with a package worth about $124 million – the apparent result of a scheme designed to artificially inflate the size of the bank’s business. Yep, this report, and others, kinda reminded me of the suspicion so common back then that banks were cold, heartless and greedy – willing and able to use legal trickery to squeeze every last penny from unsuspecting customers – not that this feeling exists today.
It’s taken me quite a number of years to gain even a layman’s understanding of how customer/bank relationships really work, but I think I’ve got a handle on some of the basics and I thought I’d share these. For instance, I used to envision that when I made a deposit in my bank account that money – my money- was sitting safely in a vault with my name on it. Kind of an idealistic, simplistic way of looking at things, but it was a comforting concept.
What I have come to realize is that “my” money becomes a bank “asset” available for the bank to use in its business – the business of making money for the bank. (Please note I am using the term “bank” here to include credit unions. Although they have fundamental differences they also have similarities that come into play for the purpose of this commentary.)
Banks provide a number of functions for their customers with one of the most common being a checking account. A checking account is essentially a contract wherein the bank agrees to provide certain services to the customer. The customer agrees to deposit funds in the checking account that may be drawn against by writing checks or by some type of automated withdrawals. The bank usually assesses fees and charges for this service which may include a penalty if the level of the account goes below a set minimum.
These fees, charges, and penalties may not be trivial. In reality, they often account for a large percentage of a bank’s income and some banks have come under official government scrutiny for questionable tactics employed to boost this income.
One of the most costly – and embarrassing – situations arises when a check or automated withdrawal “bounces”, that is, the account has “insufficient funds” to cover the demand. Some banks offer a “link” between a customer’s savings and checking accounts so an amount sufficient to cover the shortage is transferred from savings to checking – for a fee.
A more common arrangement is for the bank to offer an “overdraft protection” feature wherein an unsecured loan account is opened for the customer. This account lies dormant (except for a maintenance fee) until an overdraft occurs when it is activated and a “loan” is made to the checking account to cover the shortage.The interest rate on such an unsecured loan is usually rather high, but the service offers an alternative to the dreaded “insufficient funds” citation.
Some customers prefer keeping their checking account balance larger than necessary to cover anticipated withdrawals thus avoiding the insufficient funds problem. Sure, this will avoid overdrafts but banks usually pay little if any interest on checking accounts so these large-balance customers are essentially making interest free loans to their banks – betcha didn’t think of that.
Another common service provided by banks is the savings account. This feature has long been touted by banks as a means for a customer to accumulate sufficient money for retirement, purchasing a home, paying for education, and similar ventures. What isn’t commonly realized is that a savings account is essentially an “open-end, on-demand” loan to the bank. “Open end” means deposits may be made at any time and “on-demand” means withdrawals may also be made at any time – with some restrictions. The key here is that money in a savings account is fundamentally a loan by the depositor to the bank – a loan which becomes part of the bank’s assets.
How about them apples? Well, there isn’t enough room today to continue on the subject of savings accounts and other customer/bank relationships so I’ll continue this commentary next time. In the meantime it might be worthwhile remembering that old saying, “A banker is someone who lends you an umbrella when the weather is fair and takes it away when it rains.” Kinda fits, huh. At least that’s how it seems to me.