Tuesday, October 4, 2011

Coming Unglued at Bank of America

Bank of America customers are more angry and afraid than I realized.

Yes, everyone knows that a significant fraction of Bank of America customers actively hate the bank. I say this as someone who became a Bank of America customer two times over after two of its many acquisitions of the past decade. (I must also disclose that I had previously done work for various predecessor organizations of Bank of America.) My relationship with the bank didn’t last long. One day, I found that the bank had stopped accepting online payments for my credit card account. The only explanation, when I called to ask what had happened, was, “I’m sorry, we simply don’t offer that service anymore.” I took the hint, wrote and mailed one last check, and went on my way. From what I’ve heard, things have not exactly gotten better at Bank of America. Its long-suffering customers have had to put up with far more than I was willing to. If they are angry, it is because they have been mistreated.

Still, the response to last week’s announcement of a $5-per-month activity fee for debit cards caught me off guard. Customers are angry and frightened and are taking action. Based on the magnitude of the blog reactions, the bank has already lost a quarter of a million customers, not that those accounts are already closed, but they will be within a few days, with more to follow. And this for a fee that doesn’t go into effect until December or January. That is one reason I was expecting a more muted reaction. Worse, one initial analysis suggests that the new fee could cost the bank one half of its customers in the coming months. A quick survey found that only one seventh of Bank of America customers who have debit cards expect to pay the new fee. Of those who object to the fee, the vast majority said they would be closing their accounts. From history, we know that more than half of banking customers who resolve to close an account actually do so, and the proportion may be higher in this case because of the sticker shock and hard deadline. These surveys tend to skew toward more active customers, but this only means that other customers will take longer to move, not that they won’t move in the end. Needless to say, such a large loss of customers would force the bank to close most of its branch network. Bank of America estimated it would lose $2 billion per year because of new restrictions on debit card fees, and that was its rationale for the new debit card activity fee. But as a result of that move, it is losing at least $1 billion in deposits this week alone, and that, for a bank, is a far more serious matter.

The headlines from Bank of America in the five days since the announcement hint at an organization that is coming unglued. The main focus has been on the bank’s web site, which was offline for much of the weekend and inaccessible again yesterday. The bank’s explanation to major news organizations was that it was throttling its web servers, reducing its web capacity in a cost-cutting move. That explanation is as astonishing as it is implausible. The money the bank saves by idling servers during parts of the day is measured in the hundreds of dollars. It is not anywhere near the kind of cost savings that is sufficient to justify the risk of frightening already worried customers who collectively are worth billions of dollars. These would not be the actions of a functional business organization.

But on the other hand, the public relations response to the outage was equally dysfunctional. When the public face of a business disappears, that is normally considered a big enough event to justify sending an executive to reassure the public. At the least, you would expect a senior public relations representative to be fully briefed before facing the media. But Bank of America’s response yesterday recalls the early days of Napster, when interns who had impressive-sounding titles but no real information were sent to ad lib statements to reporters. It begs the question of what is really going on at Bank of America. At the same time, it creates the impression that the bank’s thousands of vice presidents are all too busy with more serious crises, though it hard to imagine a more pressing business problem than a near-complete failure of a business’s public-facing transactional infrastructure.

But then again, maybe it is not so hard to imagine a more serious crisis at a bank. Obviously, executives were not prepared for the furious customer reaction to the debit card fee announcement, or they would not have made it public the day before the end of the quarter, allowing customer reactions to further weaken an already distressed quarter-ending balance sheet. Many bloggers seem to believe the bank’s web site problems must be a denial-of-service attack in retaliation for the new fees, but I can find no evidence or even hint of that. The denial-of-service attack sounds like a nice theory but it simply doesn’t exist. Others have suggested that it is the large number of customers going to the web site to cancel their accounts that has stressed the system, but that is not credible either. In terms of web transactions, a customer preparing to close an account creates no more of a server load than a customer paying a utility bill. One more cynical theory I have heard is that the bank has been intentionally throttling its servers to slow down the pace of account closings, so that the deposits do not walk out the door quite so quickly. But that is something that would help the bank only if it barely hanging on at the edge of liquidity. Possibly that is the case, but there is nothing else that indicates that Bank of America is that close to the edge.

Customers might well worry, though. If Bank of America’s web site is fully back today, there might well be a rush of customers thinking they need to move their money quickly in case the servers are down again tonight. The millions of customers who are leaving anyway because of the new service charges might feel a greater sense of urgency at the sight of a bank web site that seems to be coming apart. And other customers might worry that the rush of customers leaving the bank could be overwhelming the bank’s resources, such that their money too might be made more accessible by placing it somewhere else, at a bank whose web site was not similarly at risk. This unfortunate confluence of stresses could create something resembling a run on the bank, even if customers are worried more about access to their money than the bank’s actual solvency.

Looking farther down the road, Bank of America’s solvency is not something to take for granted. The bank’s stock fell more than 3 percent on Friday and a total of 44 percent in the third quarter. Then, it fell nearly 10 percent more yesterday, a day when the stock market in general was down only 3 percent. Bank stocks usually decline by 10 percent in one day only in the final year or so, when losses are piling up and there is no plausible hope of creating the profits that will turn the bank around. But stocks can also decline just because they are misunderstood. Based on yesterday’s closing stock price of Bank of America, which was less than one fourth of the company’s book value, Wall Street is betting against the bank’s survival.

With such a low stock price, Bank of America cannot possibly issue enough stock to get out of financial trouble. It needs to sell whatever assets it can just to buy time, and then, it has to find a way to make a profit from operations. Its profits in the last two years have apparently mostly come from the stock market, and that is working against it now.

One asset Bank of America had hoped to spin off or sell was its correspondent lending unit. An investment group was seriously thinking of buying it, but the business was losing too much money to be sold at any price, so last night, the bank announced that this business unit will be wound down in the next two months, and its 1,200 jobs eliminated. Bank of America was not always judicious in the purchases it made in its decade-long buying spree, and more than likely, other things it is hoping to sell will also turn out to be liabilities rather than assets. The bank will be able to sell some assets and buy some time, but that leaves it with a bigger and increasingly urgent question: how can it become profitable again?

In the meantime, about 100,000 Bank of America customers are checking the bank’s web site this morning, hoping they find it online this time. Because they’ve decided it’s time to take their money out.