Why You Shouldn’t Hate the Banks

Any student pursuing a Bachelor Degree in Business Administration learns a very startling aspect of business — the priority of a company is to maximize profits for shareholders.  Contrary to popular belief, there are very little emotional decisions that go into such a process.  Sure, companies have a heart, but at the end of the day the driving force behind decisions are finances.  With that being said, can we really be all that surprised the banking community reacted to the Credit Card Act in a manner in which they did? Understandably, individuals who have always paid their bills on time are upset; however, it’s not the past that the banks are worried about.  Think about it, the federal government has mandated that the banks completely change their business model in under a year.  For some small companies that might not be a problem.  However, we are talking about a gigantic financial sector that has millions of customers. You cannot turn the Queen Mary on a dime.

While there are many changes the banking community must implement, let’s take a look at one example. We live in a technological age and things that seem as though they should be simple are far more complex.  For instance, the new credit card legislation requires individuals who had their interest rates increased due to late payments receive a “cure” should they make six months of on-time payments.  Essentially, their interest rates must return to the level they were before being late.  It seems simple enough; however, this is going to require a complete overhaul of the banking community’s computer systems.  Programmers simply can’t make the change and switch it on, it has to be tested.  In the case of this example, it would be a violation of the law if the banking institution did not return the rate to its previous level; therefore, you can understand why banks want to get this right. To get things right, it takes time — maybe more time than February 2010.

Don’t get me wrong, I’m not defending the banks.  Do I think that someone should be charged a $35 late fee because they didn’t have the money to pay their bill on-time in the first place — no.  Let’s not forget that we had choices in this matter as well.  Credit is not a right, it’s a privilege.  Furthermore, it’s a product.  As consumers, we have the right to do business with whomever we choose.  Think about.  What if the banking community were Pizzerias?  If each Pizzeria charged two dollars for a slice, we probably wouldn’t be upset.  Now, if each Pizzeria charged $10 for a slice of pepperoni we would be eating a lot more Chinese food.

The problems the credit card industry are facing right now were brought on by themselves.  Essentially, there are victims of their own success.  With the amount of credit cards in circulation, one can argue that there is plenty of profit to go around.  However, banks acted as businesses do — they worked to maximize profits for shareholders.  In essence, they are the epitome of our capitalist system.  These institutions saw opportunities to increase revenue and they took them.  To borrow logic from Forrest Gump, “Business is as Business does.”

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6 thoughts on “Why You Shouldn’t Hate the Banks

  1. Banks are not being required to “completely change their business model” they are just having to lower the aggressiveness of a few profit driven policies.

    Although I am a consumer advocate at heart and a huge proponent of morality in business what the banks have been able to do is nothing short of amazing. They have essentially marketed people into begging them for loans and credit. It’s brilliant really.

    Ultimately, if people disagree with banks and the way they do business, they need simply choose to do business elsewhere… which is what I have done.

    • Hello Matt,

      We differ on the aspect of the changing business model. As credit is risk based, banks must overhaul their practices so as to maintain profitability. Furthermore, the training, infrastructure enhancements and legal aspects required to comply with the Card Act will be a herculean task which necessitates the development of a new corporate structure. I could not agree with you more on the other aspects of you post. In the end, we decide the profitability of a corporation by choosing where we cast our dollar votes. As we have seen with the pay down on credit card debt, consumers are making much different choices.

      • I keep saying that the “recession” is the best thing that could have happened to individual consumers because it took this to wake us up. If the markets come back, hopefully the saving/frugality trends will continue.

      • It was a wake-up call and I share your hope that we maintain our frugal ways. The issues that stems from that is our economic growth. As 2/3 is based on consumer spending, keeping our hands in our pockets could hurt us in the short-term. I hope that the markets correct such changes in consumer habits, and believe that a more educatied society will work in the spirit of the system — making choices based on their own self interests.

  2. I’m not sure I agree that this is asking for a complete overhaul. I asked a programmer friend and he said he could write a program to detect what the interest rate should be given he has a database with the data and can run a sql query. Not to diverge from the point.. You and Matt pretty much covered my thoughts 😉

    • Hello,

      As I work with individuals who are liaisons to the banking community, I have heard much of the challenges the institutions face. They have some hills to climb, I can tell you that. I agree that the programing is simplistic in nature, but it must be modified to the particular properties of the institution. This requires testing to insure compatibility and reliability. Will it take months, no. However, this is only one aspect. If we look at the act a a whole, there are many items that must be considered.

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