Could dependence on advertising be contributing to the subprime crisis and high credit card interest rates?

In 2007, over $20 billion was spent on online advertising, and the number was far greater for traditional advertising. Banks and financial institutions of all sizes, especially large banks, have spent billions of dollars themselves to advertise both online and offline.

Since profit margins on checking and savings accounts, CDs and home equity loans are razor thin, banks need to invest in high-yield products in order to recoup dollars spent on advertising. The more banks advertise, the higher the expenditures and greater the need to recoup sums of money, resulting in deployment of that money in increasingly riskier assets such as subprime lending and credit cards. For an interesting take on the subprime crisis be sure to read this article from Investopedia.

Here is an example of bank costs when factoring in advertising:

• A customer purchases, online, a $20,000 CD paying 3% interest over 6 months
• After 6 months the bank owes the customer $300 in interest (3%)
• The bank also paid a fee to acquire that online customer. In general, it takes roughly 100 clicks (at a typical rate of $7.00 per click) to acquire just one customer. Thus, the total a bank must pay to search engines and aggregators to acquire a customer is $700. (7%)
• On top of acquisition costs and interest, banks also have to make at least 3% back on each transaction to help cover overhead and operating costs. In this case, that 3% equals $300.
• So, after 6 months, one customer cost the bank $1,300 (13%), and over half of that cost came from advertising.
• Bank fees can shave off percentage points and help recoup some of the costs, but by no means do they help a bank get close to breaking even, let alone make a profit.

Given the above information, I wonder if there is a closer cause and effect relationship between the advertising cost, the 19-25% credit card interest, and riskier subprime lending? As advertising has become such a dominant cost of doing business that it has severely influenced where banks can invest, or deploy the capital…and forces a much greater risk rate.

If banks could rely less on advertising, traditional and/or online, not only would CD and high yield savings rates be higher, but there would be no need for astronomical credit card interest rates or so much investing in subprime lending. Banks wouldn’t need to find a way to make back that 7% they squandered away on customer acquisition fees. Imagine if banks could free up 7% of costs on every customer! In this perfect world, everyone would win.

Unfortunately, banks have not had the mechanism to forgo advertising and pass the savings on to their customers. As a result, advertising continues to negatively affect their customers – and their bottom lines.