Wednesday, November 10, 2004
Fallacious Meme 2: It's a Bad Thing to Expect Free Check Services
Several weeks back, Boortz went off on a Bank of America advertisment where a lady says she wants free checking and a bunch of other goodies: (link)
So what is the bank getting out of the deal? Minimally, the time value of the money deposited in the checking account (even without a minimum balance, some positive balance will be kept in the account on average). If you don't think banks understand this concept, try to get your bank to give you a zero interest loan.
Further, banks only have to maintain the checking account's reserve ratio and can loan out the rest. As most checking accounts pay no interest, any interest earned off those loans is pure profit (without underpants!). So when someone opens a checking account at a bank, the bank receives some value from the checking account, specifically the profit from the checking account less the costs of servicing the account.
For giving the bank this valuable account, the customer can rightly demand some recompensense (it is a free market after all). Indeed any price that is less than money the bank makes would make off the account is acceptable to the bank. For savings accounts, the bank pays interest (tough less than the interest they charge for loans, as should be expected). For checking accounts, the bank generally pays for the money in terms of services.
When the customer says that she wants services x, y, and z, that is her way of signaling the value she wishes to receive for allowing the bank for using her money. Ultimately, this is no different than Walmart pricing goods (signals the customer what monetary value Walmart expects to receive for the good) or a bank advertising their loan rates. All of these parties are merely signaling what they wish to receive in exchange.
The woman is most definitely not getting something for free and both sides in the transaction must be satisfied by the trade - otherwise the trade would not be made.
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I've finally figured out just what it is about that Bank of America television commercial that bothers me so much. You know the one ... this woman and her husband are unpacking in their new home. She has obviously been to the local bank to open an account. She regales her husband with the story of her conversation with the bank. She wants free checking with no minimum balance. She wants free this, that and the other thing .... And she wants all of these things free "because I don't believe I should pay for any of it."While I'm generally sympathetic to the argument that it's wrong to expect something for nothing, that's not what's going on here. And if Boortz took a moment to examine the situation he should quickly realize that it's not a something for nothing trade because the trade is occuring in a free market. If Bank of America didn't feel like they were getting something worthwhile out of the deal, then they wouldn't agree to enter into it (much less spend advertising dollars signaling their willingness to enter into such a deal).
This woman represents the attitude of so many Americans. It doesn't matter whether or not some service actually costs anything to provide ... they not only want it free, they believe that they deserve it free! I'm surprised this woman doesn't say that the government ought to force the bank to give her the goodies she believe she so richly deserves.
So what is the bank getting out of the deal? Minimally, the time value of the money deposited in the checking account (even without a minimum balance, some positive balance will be kept in the account on average). If you don't think banks understand this concept, try to get your bank to give you a zero interest loan.
Further, banks only have to maintain the checking account's reserve ratio and can loan out the rest. As most checking accounts pay no interest, any interest earned off those loans is pure profit (without underpants!). So when someone opens a checking account at a bank, the bank receives some value from the checking account, specifically the profit from the checking account less the costs of servicing the account.
For giving the bank this valuable account, the customer can rightly demand some recompensense (it is a free market after all). Indeed any price that is less than money the bank makes would make off the account is acceptable to the bank. For savings accounts, the bank pays interest (tough less than the interest they charge for loans, as should be expected). For checking accounts, the bank generally pays for the money in terms of services.
When the customer says that she wants services x, y, and z, that is her way of signaling the value she wishes to receive for allowing the bank for using her money. Ultimately, this is no different than Walmart pricing goods (signals the customer what monetary value Walmart expects to receive for the good) or a bank advertising their loan rates. All of these parties are merely signaling what they wish to receive in exchange.
The woman is most definitely not getting something for free and both sides in the transaction must be satisfied by the trade - otherwise the trade would not be made.
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