November 04, 2011
"Dump Your Bank Day": Do Credit Unions Exploit Customers Less? Will Banks Suffer?
Posted by Erik Gerding

Outrage over Bank of America's proposal to charge a monthly fee for debit cards has not abated, even though the bank has backed down on making the change.  A social media protest to encourage customers to move funds from Bank of America (and other national banks) to credit unions has gained steam.  Organizers have named tomorrow, November 5th, "Dump Your Bank Day" (evidently, the "V is for Vendetta" film has staying power and revived popular American interest in Guy Fawkes).

This raises two empirical questions.  First, do credit unions treat their customers any better?  A great recent paper by Ryan Bubb (NYU Law) and Alex Kaufman both suggests that they do and explains why.  The paper provides both a model and empirical evidence that explain how the ownership structure of credit unions reduces the incentive for these lenders to extract hidden fees from their customers compared to for-profit, shareholder-owned banks.  (Note that this paper was written long before the "Dump Your Bank" protest started and does not endorse this movement).  Here is the abstract:

In this paper we show how ownership of the firm by its customers, as well as nonprofit status, can prevent the firm from exploiting consumer biases. By eliminating an outside residual claimant with control over the firm, these alternatives to investor ownership reduce the incentive of the firm to offer contractual terms that exploit the mistakes consumers make. However, customers who are unaware of their problems making good decisions, and consequent vulnerability to exploitation, may fail to recognize this advantage of non-investor-owned firms and instead continue to patronize investor-owned firms. We present evidence from the consumer financial services market that supports our theory. Comparing contract terms, we find that mutually owned firms offer lower penalties, such as default interest rates, and higher up-front prices, such as introductory interest rates, than do investor-owned firms. However, consumers most vulnerable to these penalties are no more likely to use mutually owned firms.

Ryan presented the paper at a workshop here in Colorado over the summer.  One of the questions I had then was why credit unions can't win customers by sending a credible signal that, to put it colloquially, "we'll screw you less."  This Bank of America episode provides an interesting answer that perhaps customers are starting to recognize hidden fees and market choices.

A second question is whether this protest will hurt Bank of America and other national banks?  There are historical antecedents for this movement.  In the 1960s, protestors tried to start bank runs with calls for depositors to withdraw all funds from banks and then re-deposit them.  I'm not aware that any banks suffered as a result. 

There is a possibility that this current protest may actually help banks somewhat.  There have been plenty of news stories of banks complaining about excess deposits.  Some banks have mulled charging fees for large corporate customers and large deposits.  Still, I would be surprised if BofA welcomed this protest, just as I would be surprised if the protest inflicted more than p.r. damage on BofA.



Empirical Legal Studies, Financial Crisis, Financial Institutions, Law & Economics, Legal Scholarship | Bookmark

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