Bank of America continues to be the country's least favorite company after attempting to impose a fee on debit card usage. A firestorm of negative publicity erupted - in the run-up to a Presidential election year. Even the most supportive of public leaders had to back off. BofA was quickly abandoned by its industry colleagues who understood all too well the precarious nature of their recovery and that they might have to return to the public trough. And then, in a humiliating reversal, had to withdraw the initiative itself.
The problem was not so much the size of the fee, but the timing and manner in which it was announced. When the customer based you serve is suffering through the third year of a recession brought on by a financial crisis created through the actions of your industry - for which you were very publicly bailed out at taxpayer expense - and the result is generation-high unemployment, you might want to think carefully about penalizing the people who kept your institution solvent.
It is astonishing that in an age in which knowledge about psychology and neuroscience deliver continuing insights into behavior, that leaders are often so clueless about the potential impact of their actions. It is not like there is not research available to forewarn decision-makers.
It may be that given the nation's penchant for legal solutions, that we pay less heed to other indices. Or it may be that too many decision-makers have become insulated from the implications of their actions. In any event our society has produced politicians who forget that voters are also consumers and business executives who forget that consumers are also voters. JL
Richard Thaler comments in the New York Times:
A GOOD rule of thumb for companies and politicians is to avoid becoming the butt of jokes on late-night TV. While most business executives understand this principle, they evidently don’t know how to act on it.
Consider Bank of America’s move to charge customers $5 a month to use their debit cards. The bank eventually decided against the fee, but not before helping to create a storm big enough to induce many people to move their business away from large banks to credit unions. For late-night comedians, the brouhaha was irresistible.
On Halloween, Jay Leno chimed in. “One kid wanted to charge me five bucks to give him candy,” Mr. Leno began. “I said, ‘Who are you supposed to be?’ He said, ‘Bank of America.’ ”
For hints about how to avoid the consumer backlash, the bank’s executives might have consulted a paper I wrote in 1986 with the psychologist Daniel Kahneman and the economist Jack Knetsch. The central question was this: What actions by companies do people consider “unfair”?
Our method was to ask randomly selected people some simple questions by telephone. Here is an example:
“A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as: completely fair, acceptable, unfair, very unfair.” Some 82 percent of the participants called it either unfair or very unfair.
To be sure, we weren’t trying to figure out what is fair. That task is best left to philosophers. We were trying only to determine what actions customers perceive as unfair. As the responses illustrate, most people don’t view a spike in demand as an acceptable excuse to raise prices.
Such judgments are puzzling to economists, business executives and M.B.A. students. I have posed the same snow-shovel question to students in my course on managerial decision-making — and only 24 percent have said that raising the price is unfair. And it isn’t hard to see why: they have learned in economics classes that when demand increases and supply is limited, prices must rise to prevent shortages. What the students don’t realize is that the rest of the population may view such actions as gouging.
Many businesses implicitly understand this. After a hurricane, products like plywood and bottled water are in great demand. Local stores, including branches of large chains, keep the long run in mind and typically supply such products without raising prices. Other “entrepreneurs,” who have no such long-run concerns, will buy a load of plywood and sell it off the back of a truck at premium prices.
Both the stores and the truck owner may be making good business decisions. The stores want to build loyalty, and the truck owner wants to make some money — and provide a good that is in high demand. If people are angry, they don’t have to buy the plywood.
LARGE businesses can face problems, however, when they forget about the long term and start acting like the truck owner.
Bank of America is not the first company, or even the first bank, to make this mistake. In 1995, First Chicago imposed a $3 fee to use a teller for a transaction that could be conducted with an A.T.M. A storm of protest erupted. (Mr. Leno had a good line on that one, too: “So, if you want to talk to a human, it’s $3. But the good news is, for $3.95 you can talk dirty to her, so that’s O.K.”)
It took until 2002 for the company, by then called Bank One, to eliminate the fee and to acknowledge that it had been a public relations error.
Why can’t managers anticipate that their actions might provoke such outrage? The best explanation may be that people’s fairness judgments are gut reactions, not economic analyses. As Mr. Kahneman explains in his new book, “Thinking, Fast and Slow,” these are the types of judgments we make instinctively rather than reflectively. Feeling your blood boil typically does not involve careful calculation.
The fact that we react instinctively to some company actions can also mean that the public anger may be misplaced. Bank of America’s debit card fee was public and transparent — generally desirable features of a pricing policy, though they may not be good for public relations. Unfortunately, more unsavory actions that are less visible may be less likely to provoke customer fervor.
In a case I consider much more troubling, Bank of America recently settled a class-action lawsuit regarding overdraft fees on debit cards. Two bank policies were called out in the lawsuit. First, when a customer ran out of money and used a debit card, the bank would allow the purchase to go through — as a courtesy, it said — and then charge a fee of $35. Worse, the bank was accused of processing a day’s transactions in this order: from the largest to the smallest, rather than in the sequence in which they were actually made.
This practice could put the customer over the limit with an end-of-day shoes purchase that would then trigger a series of $35 penalties on small purchases made earlier in the day when the customer actually still had money in her account. (Bank of America settled the case without admitting any wrongdoing.)
Regulators now require banks to ask customers whether they want overdraft protection, rather than just assuming that they do. I like this rule, but it is futile to think that regulators can or should try to prohibit every fee that customers find obnoxious. Businesses can think of new fees faster than regulators can ban them.
Instead, it would be better to ensure that all fees are transparent and salient. As I have said in a previous column, the best way to do this is to require a business to give its customers an electronic file that details all of its prices, as well as the customer’s past use. Then, with one click, a customer could then import the data into third-party Web sites that could help search for the best deal. Without such disclosure, businesses have strong incentives to make any price increases as inconspicuous as possible.
If you run a business, meanwhile, you might think twice about charging for a service that has traditionally been free. If you’re not careful, you could get some unwanted publicity from Jay Leno.
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