Large banks are able to manipulate us through harmless concessions. This could be us accepting a free credit card, having our free credit score reported to us, getting a preapproval for a loan product, or offering us a free bank account. These personal finance products put us on a hook and costs us thousands of dollars every year.
The trick of presenting something benign in hopes of baiting the consumer is practiced not just by banks but also seemingly well-intentioned signature collectors and salespersons.
A person who greets me and wants to shake my hand so that I can sign their petition is swindling me – harsh words but the truth. The person who flags me down and asks if I can help push their car off the road is merely asking for help.
We assume we are savvy consumers and sometimes let ourselves get drawn into the conversation purely out of courtesy. However, all that person needs is one word out of your mouth or one action on your part in order to engage you, bait you, and then raid you.
A great book on the topic is Influence by Robert Cialdini.
Because we believe that we got the bank account for free or the credit card for free, we may feel obliged to use them. Some will even go into debt in order to ‘pay back’ their bank for this free gift.
The more services our banks offer us for free, the more indebted we feel – this is rarely a conscious feeling. It also affects our loyalty which may later cloud our judgement when it comes to making a better financial decision.
I have decided to stop doing business with my current large bank. They haven’t don’t anything wrong but the ‘conveniences’ offered by my bank aren’t conveniences at all but further exploitation of the harmless concession model.
What am I Getting in Return?
Does the fact that I have banked with my big-bank for over a decade make it more likely that I will get a mortgage or loan or banking service? Absolutely not!
They might thank you on the phone for ‘being a loyal customer since 199x’ but that’s yet another way to bait you. If you really think I’m a loyal customer then offer me a lower rate on my debt, refinance me on my good word, or wave my minimum account balances.
I see more advertisement on my big-bank account website than I see on Google. I am allowing my bank to advertise to me for free without offering me a free service. In fact, I am stashing my money with them while they profit heavily and I get a 0.25% return.
Solution: Don’t let the bigger banks profit off of you unfairly, advertise to you constantly, or trick you with their harmless concessions. Consider doing more of your banking with non-bank institutions such as PayPal or move to a credit union.
The Debt Concession Model
Does your current debt balance make you more likely to take on further debt? Yes.
If you are completely debt free, are you less likely to take on further debt? Yes.
If you have completely gotten rid of all your debt and take on debt again, are you more likely to pay it off sooner? Yeap.
If you are already $500,000 in debt then taking on another $20,000 may not be a big deal. This is why healthcare professionals are such easy marks for banks.
Us west-coast doctors often have debt balances in the $1.5M range very early in our careers. Add to this the high cost of living, and paying off debt becomes a low priority. Since living life is a higher priority, what’s the harm of adding a $50k auto payment to the mix?
Maintaining Your Credit Score
I have been completely debt-free for a few years and I still have this ingrained fear of my credit score dropping. I was raised in a society where my economic value and trust is based on my credit score.
Our credit scores are another form of harmless concessions in personal finance. It didn’t take long for our banks to figure out that by reporting these numbers to us for free, they are more likely to keep us engaged in the debt game.
For those who continue to carry debt, maintaining a good credit score is imperative because some debt, though very few, are callable. And in hopes of being able to refinance in the future, we aim to do everything possible to have solid credit scores.
Solution: Let your credit score slide or don’t check it. If your goal is financial independence and early retirement then you could care less what your score is. With enough money in the bank and a low overhead, banks will line up to lend you money even with a credit score of 315.
The Subscription Model
Harmless concessions are also exploited by companies which know that we already have a monthly subscription and are therefore more likely to take on further monthly obligations.
This has become so blatant that some companies have abandoned the 1x fee model for the subscription model in lieu of an ongoing subscription model.
This may not be an issue for the very strict budgeters but most of my readers don’t budget according to my recent survey results.
Ting charges me an ongoing $6/month fee for having an account with them regardless of whether I use my cell phone or not. Their incremental model is completely contrary to this monthly fee and yet without paying it, I cannot maintain my phone number and account with them.
I suspect that by having an ongoing monthly payment I am more likely to use the phone or else I would feel like I’m ‘wasting’ $6 every month. In the personal finance world this a common tactic.
I still love Ting, don’t get me wrong. I’ve had them for years and it’s the best cell phone service I’ve ever owned. I get charged for each chunk of data, text, or minutes that I use. Furthermore, the app allows me to limit my usage so that I don’t go over my personal allotment.
Solution: Either don’t get attached to a single telephone number so that you can avoid having an ongoing ‘active line’ fee or find alternative ways to communicate for free through Google Hangouts and WhatsApp.
Obviously the price point that Netflix has set for their streaming movies is quite low when compared to what they have to pay for their licenses.
However, the $7.99 price isn’t meant to cover their overhead. Instead, it’s the harmless concession which is forcing the marketplace to get hooked on the streaming service model.
Later when the prices are raised for ‘obvious’ reasons, nobody will cancel their service and gladly pay the extra fee. Few will have worked on alternatives to Netflix and would rather pay even triple the prices rather than lose this luxury.
Solution: Find alternative ways to enjoy free streaming entertainment. Borrow movies from your library either digitally or physically.
Patients Exploiting Harmless Concessions
very one of my drug seeking patients stands up, shakes my hand, and introduces themselves to me when I enter the room. The harmless concession was them forcing me to be nicer to them than with my average patient.
From this position of power, the patient will continue making demands. They will always start with outlandish requests and will make their real and eventual request in the end.
The whole interaction goes downhill once they have laid their entire spiel on you. They have gotten you to feel bad for them, sympathize with them, agree with them, and say no to them.
Solution: Do not engage a drug seeking patient in a jovial conversation. Take the lead and set the tone and pace for the visit and do not allow them the opportunity of making you feel indebted.
Harmless Concessions In Spending
When it comes to budgeting we might set a goal for ourselves to spend no more than $150 on dining out for the month. Once we blow it then does it really matter by how much we go over?
Most budgeting strategies won’t account for this factor. However, YNAB does a great job at addressing this. All’s not lost just because you went over your budget – you simply sacrifice another category’s budget to cover the overspending. The cycle ends there.