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Bank of America's pricing woes

November 1, 2011 by Dale Furtwengler — President, Furtwengler & Associates, P.C.

It seems that every time Bank of America tries to raise fees it gets hammered in the press. Why is this? More importantly, what can you learn from their experience?

Bank of America's (BOA) latest attempt at raising revenues, charging for debit card usage, has met with a maelstrom of consumer and media attention rarely seen in the world of business. Why such a hue and cry over a modest price increase? Let's take a look.

One of the key factors is that BOA is asking customers to pay for service that previously was "free." Now you and I know, logically, that nothing is truly free; any freebie is subsidized by other profit streams. 0% financing on your car doesn't mean that the financing is free, it simply means that you're not getting as much off the sticker price or as much for your trade-in as you'd have gotten with a 2.9% financing deal. The same is true with "free" debit card usage. Yet, when we're told something's free we psychologically accept that premise and resent having it taken away from us. Why is that?

In part, we assume that because the debit card was free it must not have cost BOA much to offer the service. This may or may not have been true, but that's the impression BOA gave us by offering the free service. Continuing with this line of thought, if it didn't cost much to begin with what's the justification for the price increase? We're not getting any greater value than we did before and if the costs were miniscule to begin with what's the justification for the increase? Absent increased value or a cost justification we, as consumers, are not inclined to pay for something that was once free.

Now let's contrast that with an modest increase on an already modest fee and see how we'd react. Let's assume that you'd had been paying $4 a month for the debit card and it went to $5, the fee that BOA is proposing, would you stop using your debit card. Probably not. Why? You know that there are costs associated with any service and those costs go up over time so you'd expect a periodic increase in the price you pay, right? Of course you would. So it's not the amount of the fee that's a problem, but the fact that the service was free.

One of the interesting aspects of this whole saga is that BOA is only one of a significant number of banks proposing these fees, yet Bank of America has taken the brunt of the public's disgust with these fees. Why? The answer, I believe, lies in BOA's recent history.

BOA's leadership made a lot of bad business decisions during the past few years. BOA bought the failing Merrill Lynch brokerage firm that was heavily laden with subprime mortgages. That purchase was on the heels of its earlier acquisition of Countrywide Financial, another heavy player in the subprime mortgage market. These poor decisions show up in BOA's numbers vis-a-vis the swing from a $6.2 billion net income in 2009 to a $2.2 net loss in 2010.

Combine that with the fact that BOA was one of the larger TARP recipients and we see consumer sentiment that, in essence, says "We don't fee that we should pay for your mistakes." The fact that BOA's TARP funds have been repaid with interest does not increase the buying public's desire to help a struggling company.

What lessons can we take from BOA's experience?

• Don't offer freebies to your customers - they won't value them and definitely won't pay for them later.
• Don't subsidize one offering with the profits from another offering- it confuses buyers and makes future pricing changes more difficult for them to accept.
• Don't raise prices without an increase in value - while customers may accept a price increase to offset rising costs, they often doubt the validity of your cost increases.
• Don't expect consumers to pay for your bad business decisions - they're not that magnanimous.

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