Money in my pocket but I just can’t get no love (Dennis Brown lyrics)
Banks spend an awful lot of money trying to attract new customers. Chase spends over $2bn a year on marketing almost all in the US, that’s more than Apple spends globally on marketing. Someone has to pay for the billions spent convincing you to change banks/credit cards/mortgage lender. That someone is you.
It is possible to win at this game though and turn the tables on the banks — if you put the energy into it. You just need to understand how and why banks design the promotions they do, and how to game them. Banks hate people who game the system, its like casino’s don’t allow card counting because it puts the power in consumers hands and they prefer to keep the odds stacked in their favour.
First, you need to understand banks greatest enemy and the biggest friend is consumer inertia. They know it takes an awful lot to convince consumers to go through the effort of moving bank. Once we do however we tend to stick at it for the long term, 16 years on average, despite the almost universally poor value and customer service that the big banks provide. Inexplicably we put up with terrible rates of interest, high fees and poor service but we just don’t like to change.
Banks have responded to this challenge by creating seemingly rich offers and incentives to move bank. It’s not sophisticated but it works. They assume some people will game the system but never enough to change the odds in their favour.
Here’s how it works example 1 — Chase Saphire Banking
This offer of a free $1,000 comes with a few conditions — “qualifying activities”. The key one is that you have to have $75,000 in the account for a minimum of 90 days. Just long enough to forget about it. This is the equivalent of the “free to pay” model to beloved of subscription services. They assume a good proportion of people will just forget — have you checked how many TV subscriptions services you have currently? So pervasive is this model and so reliant on consumer inertia and open to abuse that MasterCard recently made the very unusual step to ban such offers.
Holding that $75K for 90 days will earn the consumer 0.01% interest or $1.87c. Chase itself will likely make $1,218 in that same period (using the average weighted cost of capital of 6.5%). So by giving you the $1,000 they are already ahead on the profits from using your money at effectively zero cost of capital. Every day the consumer leaves these deposits in nets Chase substantial profits. The value of any customer able to leave $75K in such a low-interest account for 3 months is very great indeed.
The alternative would be to put the $75K in an account paying reasonable levels of interest. At 1.7% APY this would provide $318 in interest. So clearly the best strategy here is to deposit the minimum funds in the account and on day 91 move them to a competitive account offering something similar. Your net gain would be about $1,000.
So that’s bank accounts sorted. What about credit cards?
Here’s how it works example 2 — Chase Saphire Reserve
Chase Sapphire Reserve has become something of a rite of passage for young upwardly mobile professionals. It’s a badge to signal successfully reaching the first rung of the ladder of affluence separating the student/young professional from their future senior executive selves. Despite its strong brand positioning, the credit card industry is fixed on providing upfront incentives and promotions to attract new customers.
50,000 points sound pretty good. All you have to do is open the account (as long as you are a new customer) and spend $4,000 in the first 90 days. The value of these points is apparently $750 when you use it to book travel using your card. This card is so good apparently that it requires consumers to pay for it $550 a year. So the net benefit in year 1 is really $250 assuming you use all the points as proscribed (many people do not — breakage being a key part in the business model for any card portfolio).
Chase itself will make around $90 on that $4K initial spend assuming an interchange rate of around 2.2% of which they will give around half back to the consumer as benefits and rewards so a net of $45 or so. The bank is betting you will continue to use the card at a similar level for the rest of the year and subsequent years after that, or at least a significant majority of new consumers will.
The way to game this offer seems pretty clear, apply for the card, get the points with the spend and then cancel it at the end of the first year so you are not charged the $550. Your net gain will be about $200 — go you!.
So the total gained from gaming Chase Sapphire and Chase Sapphire Reserve is around $1,200 if you are very disciplined about opening the account with the minimum qualifying activity and closing them or withdrawing your money as soon as the qualifying criteria are met.
Complete that cycle 3 or 4 times a year and you can honestly hold yourself up as someone who has got more from the banks than they got from you.
The majority of people, however, don’t have the time, energy or inclination to play these games with the banks and the banks rely on these customers for their profits. And profit they do:
For these customers, there is really nowhere to turn. The top banks in the US all offer remarkably similar products and equally poor value for money. No wonder the CEO of Chase looks so pleased.
Why we as consumers are not demanding better or industry regulators, journalists and analysts are not clamouring for change is a bit of a mystery. It is certainly true the combined $10bn a year that the top 6 banks spend on marketing goes a long way to buy the silence of the media who rely on these dollars for their commercial viability. The banks are not going to change on their own, the economic incentive is just too great for them, they cannot afford to provide consumers with better value for money, their share prices would collapse and they would be valued as the utilities that they are.
Real change then is going to have to come from new competitors with nothing to lose — it maybe startup FinTech companies and/or established companies like Goldman Sachs moving into the retail banking space. It’s not clear how long this process will take — overcoming the natural inertia of consumers in banking and the trained indifference to the poor experience the industry offers them will be the biggest challenges to change.