Bank of America Follows in Information Cascade
All banks and bank customers are connected by a network. People have money and they need to store this money in one place or another. Money is essential to our wellbeing, thus storing money is essential to the employed. As bank users, we have influence over a bank’s practices and banks have influence over other bank’s practices.
In the past few months, many large banks attempted to introduce another banking fee. After the up roar from customers outraged by the addition banking fees imposed on checking accounts, banks had the option to keep the fee, or forgo the fee. Though not particularly moved by the overflow of complaints and criticism by costumers about the $5 fee per month for the use of a debit card, Bank of America remained steadfast on keeping its fee.
Over this past weekend, two major competitors, Wells Fargo and the nation’s largest bank, JPMorgan Chase, changed their plans to not have a similar banking fee. Then, Monday, Oct 31st, SunTrust Bank also dropped its $5 charge. Finally, on Tuesday morning, November 1st, Bank of America announced that it would also not charge the fee and would discontinue plans to do so. Through this movement, there has been a collective outcome from which now, all major banks have dismissed their monthly banking fees.
Bank of American imitated and followed the choices of other banks. They followed to the crowd. Though they would have gained billions from the added banking fee, they would have suffered in loss of credibility and negative criticism from government officials and Bank of America (BOA) customers. The bank didn’t disclose a number as to how many customers closed their accounts after the first announcement concerning the fee but a source close to the bank stated that “closures were higher than usual. And smaller institutions like PerkStreet said that their account acquisition rate had spiked in the days afterward.” There are direct benefit effects and information effects from BOA’s decision to align with the behavior of other major banks. BOA learned from other banks’ decisions. By conforming, BOA will hold on to its customers and hopefully restore their public image and customer faith.
Sequential Decision-Making and Cascades
Let’s assume that the first bank followed their own “private signal” and choose to forgo the banking fee. The 2nd bank had two signals, its own signal and the signal of the first bank to forgo the fee. The 2nd bank also chose to forgo the banking fee. After the first two major banks decided to drop the banking fee, according to sequential decision making and cascades, bank 3, bank 4, and all other major banks would have eventually chose to drop the banking fee as well and follow the majority signal.
From learning about cascades, we know that cascades are fragile and following the cascade can in fact be a bad idea. Joe Gillen, chief executive of Pinnacle Financial Strategies, says that because banks are not able to impose a debit fee, customers can expect more fees over time. The debt fee was made very public so customers knew of the change. Mr. Gillien says that banks” are going to have to hide the fees and customers will still have to pay them.” Banks are losing billions of dollars in revenues due to federal rulings restricting overdraft fees and limiting fees from debit card purchases. Banks aim to finds other ways to fill in the hole. The question is will we be aware of the next fee strategically placed on customer accounts that aim to recover lost revenues for banks?
Regardless of Bank of America’s own private information and private needs as a bank, it was in their best interest to join the rest of the leading banks. An information cascade occurred benefiting customers for now. The officers at Bank of America drew rational inferences from the situation and followed the actions of other major banks.