We had an excellent discussion at BAI’s PaymentsConnect conference recently, where I had the pleasure of serving as moderator for a panel that included Jimmy Allen (Group EVP of Retail Banking at Broadway Bank), Alex Calicchia (CMO at MidSouth Bank), and Dominic Venturo (Chief Innovation Officer, Retail Payments, at U.S. Bank). But more importantly, we had the feedback from over 100 senior bankers who participated in our industry survey.
The discussion focused on two issues: the near term impact of the changes in Reg E, and
- more importantly – what will banks to successfully generate DDA income in the future.
Here are some of the key takeaways:
- Enormous revenue is at risk – management of the opt-in process is critical
- It won’t get easier: deposit fee income will continue to be under pressure, and more restrictions are likely
- It’s not a revolution, but an evolution: most banks won’t impose significant new fees or completely eliminate Free Checking
- There is no silver bullet: banks need to re-focus on building profitable relationships. It’s been too easy to sell “Free” and make money on fees. You need to have the right technology (CRM at the point of customer contact), effective on-boarding, and strong sales process to succeed.
- Product innovation – and a culture of innovation, testing, and continuous improvement
- is critical in this new and uncertain environment
In contrast to the industry trend, Bank of America recently announced they won’t attempt to convince consumers to opt-in to the new Reg. E rules. Advocacy groups, the press, and legislators praised this decision. Competitors were left wondering why BofA, which is known for its’ sharp pencil, decided to forego this important revenue stream.
Were they trying to head off additional legislative or regulatory restrictions? I’m sure that was part of the calculus. But here’s my theory.
First, it’s important to understand who pays overdraft fees. Let’s do the numbers:
86% of consumers are not likely to opt-in. 74% don’t overdraw their accounts and pay no fees. An additional 12% overdraw less than 4 times a year, typically because of an error or miscalculation about funds availability. For these customers, overdraft fees especially resulting from relatively small dollar POS transactions where opt-in is required — are highly unpopular. Industry surveys suggest that most would rather have the transaction turned down than pay a fee of as much as $35. Plus, if the transaction is rejected, these customers usually have other means of payment, such as a credit card.
- Of the remaining 14%, only 9% are heavy overdraft users. And to parse this even further, 70% of total NSF/OD fees come from the 5% of consumers that are especially heavy users.
This all reminds me of the old story about a sales meeting at a pet food company. The manager is berating the sales force: “We’ve got the best packaging in the industry. We’ve increased our advertising. We upped our incentives. What does it take to get you to hit your sales goals?”
From the back of the room came a lone voice: “The advertising is great, but the dogs just don’t like it!”
Our assessment is that BofA decided it was not worth the effort to convince customers to sign up for a fundamentally unpopular service, and took the high ground. Turn lemons into lemonade: “We’re the good guys, we’re not going to try and convince you to sign up for something you don’t want!”
But I don’t think for a minute that BofA is walking away from this revenue stream. They’ve already hinted that customers will be able to pay a fee at the ATM (or possibly opt-in?) if funds aren’t available. It just won’t be automatic. And I’m sure they are working on alternative approaches to market directly to the 5% who are most likely to need, want and use, what is essentially a short term loan service. Several banks are already testing interesting approaches to meeting the needs of this segment. Stay tuned for more to come!
It was great catching up with old friends at industry conferences this month. But as I updated my contact list, crossing out old bank names and substituting new ones, I started to ponder the continuing issue of consolidation in our industry. How much more contraction is coming? What will banks, especially community banks, need to do to be survivors?
In the past year, bank consolidation has been driven by the Friday night FDIC takeovers. But we believe the tide will turn and healthy banks will become aggressive acquirers again beginning in late 2010 or early 2011.
The long term trend is clear — the number of FDIC insured institutions declined from just over 18,000 in 1984 to just over 8,000 at year end 2009. Credit Unions showed a similar direction: there were over 15,000 in 1984 but only 7,800 today.
If we just continue the current trend, the number of FDIC insured institutions will shrink by 33% in the next 5 years. But the contraction could be even greater. Here’s why: Continue reading