Loans Answers

Bank goof – Small Accounts

Question: WHY are small accounts real headaches for banks?! Since the advent of computers and electronic maintenence of banking, WHY would there be “a lot of servicing?” Money sitting in accounts adds to a total of which some can be lent and make money for the bank. It has made me angry for years since service fees and minimums have come into being for savings accounts. And as mentioned, now they take money *out* for inactivity. How are children to be taught to save money in bank accounts and to get pleasure in earned interest? For example, I have one small passbook savings account which requires no mailings by the bank, which I have to try to remember to “tweak” each year to keep it active! That means I have to do something like withdraw and then redeposit some money. My word for bank fees is ARGHHH! Please explain it to me! –Phil

Answer: It requires much less servicing to have 10 accounts of $100,000 than it does to have 10,000 accounts of $100. It generally follows the 80-20 principal–80% of the time is spend servicing 20% of the smallest accounts. These are normally the people that don’t have enough money to cover fees and service charges with their small balances; if they did, they would have an interest bearing account. They also frequently call to check on their balances or to ask if a $5.00 check has cleared, and they tend to write the vast majority of hot checks. (The only advantage I can see of having a greater number of accounts is that it would offer less chance of losing your customer base).

We did a survey some years ago when I worked in a bank and found that it cost about $45 just to open a new account. This included the time spent at the New Accounts desk, the paper work, the time to enter the information in the computer, the forms, and a credit report–we pulled a credit report on all potential customers since the ones with bad credit invariably turned out to be high risk customers for the bank.

Small dormant accounts are also a headache. I worked for a bank which had certain state banking requirements for reporting dormant accounts and, after a certain period of dormancy, required transferring the dormant balances to the state. This takes time, which translates into costs.

Dormant accounts are a problem in another sense–they are considered an easy target by someone willing to steal from within the bank. The thinking is that since the customer may be dead, or may have moved away, it would be unlikely that stealing from these accounts would be noticed. Because of this, one of the first things that the state banking examiners, or the FDIC examiners, would ask for was a list of dormant accounts. This, in turn, made us keep a more watchful eye on these accounts to the extent of verifying any, and all, transactions to a dormant account–more time spent, hence, more expense.

I don’t have an answer for you about teaching kids to save money and earn interest. The best answer I can think of is to explain the reality of the situation–as in any real life arena, the people with the most money get most of the privileges.

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