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Dennis Santiago

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Is Bank of America Working to Snatch Defeat From the Jaws of Victory?

Posted: 04/26/2012 3:41 pm

The Bank of America seems to have a knack for stepping on its own feet. The institution that continues to struggle with cleaning up a mortgage portfolio that includes the remnants of the acquisition of Countrywide has been at a disadvantage competing with better-positioned competitors in the performing loan accumulation -- that's big banks buying up the mortgage servicing rights from smaller banks typified by the business efforts of Well Fargo Corporation. These banks are doing this to offset their assets portfolios as they become some of the world's largest landlords, owning a growing portfolio of foreclosed homes. That's called becoming an unwilling Real Estate Investment Trust (REIT). Well, you have to do what you have to do.

Bank of America is also somewhat disadvantaged competitively in the large commercial lending world, where there is a combination of cheap Wall Street money and the private and business banking-oriented institutions that bid far more aggressively to get whatever quality business is available in a still-slow Main Street economy.

So the company has gone back to its traditional base of strength, the U.S. consumer. The bank has some sort of financial relationship with a sizable fraction of individuals, maybe as large as 50 percent of all consumers. In addition to the checking accounts and credit cards of millions of Americans, their debit card business has become the cash substitute of state welfare programs much to the chagrin of social advocates of the "Unbanked and Under Banked" poor who loathe the Bank of America.

Of late, the bank has also focused a great deal of effort into small business lending to Main Street America, an area much in need of attention by the entire banking industry if we are to ever repatriate 10% of the U.S. manufacturing base to our shores and get this economy back into sustainable equilibrium. Granted, this is a necessity of being so disadvantaged in other areas against the competition but overall, despite the vitriol of the progressive press, in my opinion, this bank is actually doing a number of things congruent with the emerging needs of the economy. I mean what's not to like about a big bank that actually depends on the goodwill of millions of individual consumers for its survival?

So how can one mess this up?

Well, you need to be careful about making large swaths of people unhappy lest they form effective boycotts against you. That's just making uphill battles for yourself. Bank of America knows this all too well, having been the centerpiece villain of the "Move Your Money" movement in 2010. That time, while progressives claimed most of the credit, it was clear that the movement to strike back at growing industry reliance on things like bail-out money getting used to cover up bad business decisions and using too much fee income as a percentage of total income by banks was far more widespread. There was not a lot of difference in the ire of liberals and conservatives on that one.

This time around I'd say that the BofA's biggest risk is triggering the ire of U.S. small business by appearing to be an arbitrary and unfair political judge of the U.S. industrial landscape. For instance, I noted the other day that a company called McMillan Group in Phoenix, Arizona reported that their business banking representative from the Bank of America visited them to cancel a 12-year-long relationship with the manufacturer because the bank reportedly has a policy against working with the firearms manufacturing industry. The response by McMillan was apparently to cut the meeting short, inform the bank that they will be taking their business elsewhere, and that they will henceforth refuse to accept any check written on a Bank of America account or a Bank of America credit card as payment for their goods or services. Lesson of the day: Never underestimate what an American business owner can and will do if you annoy them. Checks and credit cards are not legal tender and it causes U.S consumers to learn about and make use of viable alternatives to your business.

I found this example particularly interesting because this kind of corporate social policy seems to have many dangers for a bank whose future depends so greatly on American cultural diversity. What the secondary effects will be, as word of this travels, on their personal and corporate deposit base, credit card account cancellations, line of credit relationships and migrations of small business accounts to alternative providers at the 7,800+ other banks in the United States hungry for business, who knows. It does cause one to ask if BofA has really thought its reputational risks through in such cases.

The fact of the matter is that are many other "not so politically correct" U.S. industry segments that a bank could also choose to bar from its teller windows. BofA is not the first to allegedly delve into social engineering-coated money. PayPal has chosen similar categories of business that cannot be transacted over their systems in the past. Mostly what it's done is enabled other innovators to fill the gaps, and the finance industry is never not experimenting with new forms to fill whatever gaps money collects in. The strategic business question for BofA is to what degree they wish to leave money on the table and enable competitors to take footholds in their Main Street America business lending book. That's a cold hard cash question, not a 'kumbaya' one.

 

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