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Taking Advantage Of The Economic Downturn, Irrelevant Information Edition…

April 24th, 2009 · 12 Comments
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So I was walking along in Harvard Square when I saw the following:

(For context, it must be noted that there are like 800 banks in the middle of Harvard Square. I’m not sure why this is, especially since they crowd out the places that you need in order to spend the money thay you are putting in the bank, at least temporarily.)

First off, I think it is funny that something called Sovereign Bank is advertising that it’s part of something bigger (the Spanish company Santander Group in case you were curious). But more importantly, how is it really helpful that it is “one of the world’s safest banks”? (For the record, I couldn’t read the tiny footnote that backs up that claim even when I was standing in front of the sign.) The whole concept of FDIC insurance means that it is largely irrelevant to the consumer whether or not a bank fails. Furthermore, the rules of what is and is not insured were chaged recently such that checking, savings and even money market checking are insured up to $250,000. (Things like Certificates of Deposit are also insured.)

Perhaps the bank is trying to lure in customers that would surpass the $250,000 limit- no wait, that doesn’t make sense, since I am guessing that high net worth individuals are not so much impressed by a sign on the sidewalk. Perhaps the intention is to sell products that are not FDIC insured, such as mutual funds…but you will notice that the sign is advertising checking accounts. Hm.

What is the lesson for the consumer here? First, don’t get sucked in by a value proposition that is largely irrelevant. Second, as an important corollary, definitely don’t accept a lower interest rate (on an insured account) for the privilege of being with a “safe” bank. We know that people are scared about the fate of their money, but seriously, don’t be dumb. These banks seem to be looking for ways to poach customers in an industry where individuals are usually pretty complacent.

In my incessant Googling to try to make sense of this matter, I realize that I am not the only economist to be confused by this particular issue. Apparently Paul Krugman is in good company. 🙂 (For the record, I saw it first- April 16th to be exact- I’m just slow with the posting sometimes. I’ll work on it.)

Tags: Advertising

12 responses so far ↓

  • 1 LL Cool A // Apr 24, 2009 at 1:16 pm

    Jodi, people are stupid. In order to separate stupid people from their money it is best to scare them into giving it to you.

  • 2 econgirl // Apr 24, 2009 at 1:18 pm

    …and I am merely telling my readers to not be stupid people. So, you’re welcome. 🙂

  • 3 Dan L // Apr 24, 2009 at 2:12 pm

    Wait, you’re talking about the interest rate on a checking account, when they (apparently) want to hand you $100.

    You beat Krugman here for noting the irony in the name Sovereign Bank.

    Side note: Back in 1996, the most prominent bank in Harvard Square was BayBank, which merged to become BankBoston, which soon later eaten by Fleet, which was eaten by Bank of America, which was essentially eaten by the United States. Apparently, it’s still quite a happening place:

    http://www.boston.com/business/articles/2006/01/08/harvard_sq_is_a_bankers_dream____or_nightmare/

    Another side note: Sovereign apparently gives you $100, it’s part of one of the safest banks in the world, AND they have video tellers!

  • 4 BBourke // Apr 24, 2009 at 2:29 pm

    Isn’t this a case of perception equals reality? Isn’t this similar to the Marketing strategy that Hyundai deployed, where they found that all of the traditional gimmicks like 0% APR and cash back were not increasing sales, because after some focus group studies they realized that the ultimate barrier to purchase was more tied to an uncertain future. They then rolled out the program where if you lose your job in the next year, they will cover your payments and even take over the loan (and car) free and clear. To date, they haven’t had anyone take them up on the offer, which would one to suspect it was an irrational, yet very real fear. I’m guessing Sovereign Bank is still finding people that think their mattress is the safest spot (see Sen. Burr – R -NC).

  • 5 econgirl // Apr 24, 2009 at 3:10 pm

    The lower interest rate point was more of a hypothetical “don’t be an idiot” point. It wasn’t meant to be tied in with the $100 up front incentive.

    Does anyone else find the ads on this page particularly amusing? On the left, I get something about a Capital One online savings account (which doesn’t claim to be safe, for the record, other than being FDIC insured), and on the right I get some crazy looking thing asking me “These Banks Are About to Close…Is Yours One of Them? Click Here to Find Out Before (underlined and in red) It’s Too Late”. Um, thanks, but no thanks…

  • 6 Matt D. // Apr 24, 2009 at 7:01 pm

    That is actually pretty funny, about the ads right there…sure you didn’t plan that?

  • 7 Rich C // Apr 24, 2009 at 8:16 pm

    As Rahm Emanuel himself says: “You never want a serious crisis to go to waste”. It is becoming a motto for many these days.

  • 8 Charles M // May 4, 2009 at 10:30 pm

    Wait a minute, how long does it take to be reimbursed by the FDIC after a bank fails? I thought the problem when WaMu was going under was that the losses would greatly exceed the FDIC’s reserves. Am I wrong? And $100 to open a bank account, I’m in. Much better than a toaster.

  • 9 econgirl // May 5, 2009 at 4:42 pm

    @Charles M: See, I thought about that, since clearly FDIC insurance is by no means a perfect substitute for a functional bank if it takes forever to get your money. My Google researching indicated that the turnaround time was such that customers would not be burdened, but I suppose this may not be true if there is the reserves issue that you mention.

  • 10 Tom W // May 5, 2009 at 10:32 pm

    Virtually all bank failures are resolved when the FDIC purchases some of the failing bank’s bad assets — which removes the problem that made the bank insolvent/worthless — then sells the failed bank to another bank. The failed bank becomes a branch of the suitor bank it was purchased by . . . and customers of the failed bank go on writing checks that are honored by their new bank. There is no interruption in service.

    That is also how the Washington Mutual failure was handled. JPMorganChase was the successor bank, and the cost to the FDIC was zero.

  • 11 Patrick Kilhoffer // Jun 13, 2009 at 11:04 pm

    You are giving the bank way too much credit.

    Their ad agency thought the client (the bank) would feel good about the poster because it said something positive about them, so they pitched the idea. The bank liked it because it said something positive about them. The ad agency didn’t care if it was effective, because the bank wasn’t planning to give them any feedback anyway. The bank didn’t measure the effectiveness of the ad because that could result in someone saying they made a bad decision.

    The ad agency gets to list the bank as a client, and the bank can point to the poster as a way they are branding themselves.

    Everyone pretends they won and declares victory.

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