I’ve been polling banks and credit unions on the results of their Reg E opt-in efforts. Successful financial institutions are achieving a total opt-in rate in the mid 80% range, with opt-in rates for the most active overdraft privilege users in the mid 90%.
Deposit fees are an important source of revenue and it is critical that your opt-in program successfully minimizes income loss. In the short term, this means maximizing consumer acceptance, especially among the roughly 10% of customers who are the source of about 80% of deposit fees. This is important now to preserve revenue, but it is also a long term strategic imperative: as fewer consumers write checks, deposit fees will be driven by debit activity and you’ll lose that future income opportunity if you don’t get your customers to opt-in.
If your program is not attaining total opt-in rates around 85%, and if you aren’t getting about 94% opt-in for the 10-15% of your customers who are the heaviest users, then you should be re-evaluating your program.
While many financial institutions have a very good handle on these dynamics, I’m continually surprised by the very basic questions I get, especially (but not always) from community banks and credit unions. I’m particularly surprised at how often I’m asked “Do we need to get consumer opt-in if we don’t charge for debit overdrafts?”
The simple answer is “no”, but if you don’t get positive opt-in you never can charge a fee for that service. And you should.
It’s OK to have more flexible and forgiving policies, if that is your customer centric and competitive strategy. But not charging at all either means you are refusing all transactions, even for customers who have very significant relationships with you and simply made a mistake (therefore not delivering the highest level of customer service), or you are authorizing payment without any compensating fees for the service you are giving and the risk you are taking.
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There’s a balance that works for you and your customers/members. We can help you find it. Peak Performance Consulting Group has best practices and unique solutions, with a proven track record of success helping clients achieve industry leading results. Contact us
- our experts can help you unlock the key to additional profitability and efficiency.
I’ll probably get lots of feedback from this, but here goes: Debit Rewards programs mostly reward vendors who sell Debit Rewards programs. There – I’ve said it.
Strategically, it makes sense to encourage customers to use their debit cards and it makes sense to reward loyal customers. But the simple fact is that most Debit Rewards programs don’t significantly shift customer behavior or increase retention, so there is little return for the marketing investment. Here’s why they don’t work, and here’s what you should do about it.
Debit cards are used as a substitute for cash and the typical spend is about $38. At this level of activity, it is very difficult to generate meaningful rewards. Customers recognize this it is why participation in Debit Rewards programs hovers around 8-9%, even when financial institutions offer it for free. Furthermore, revenue from interchange will only decrease in the future, leaving less available to fund rewards programs. More retailers are finding ways to automatically recognize debit cards and direct them to PIN debit (vs. higher interchange Signature Debit), and interchange rates are under significant political and regulatory pressure. Long term, there is no upside for debit interchange revenue, and lots of downside risk.
This is a very different proposition from Credit Card Rewards, where the average spend is higher, the interchange is higher, and there is revenue from interest charges and annual fees.
So it is hard not to come to the conclusion that the typical Debit Rewards program just results in paying incentives for volume that financial institutions would get anyway.
But, as I said earlier, it makes sense to encourage debit usage and to reward customers. There are effective ways to do this — institutions in the top quartile of debit card usage have 27% more transactions and create about $120 per customer in debit related revenue. They do this by better targeting of customers to stimulate truly incremental volume
- not a “one size fits all” rewards program. In fact, many don’t even offer debit related rewards, but just focus their energies on shifting behavior of specific consumer and business debit card usage segments. Here’s just one example: changing the behavior of the 8% of debit card holders that only use their card at the ATM, and don’t use it at all for merchant purchases.
Rewards programs may have their place, especially when they recognize the total financial relationship (consumer and business) that a household has with your financial institution. But for most Debit Rewards programs, the value simply is not there.
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Need expert help improving revenue from your consumer and business checking accounts? Want more information on how to significantly improve the performance of your debit card portfolio? Peak Performance Consulting Group has best practices and unique solutions, with a proven track record of success helping clients achieve industry leading results.
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- our experts can help you unlock the key to additional profitability and efficiency.
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
How Banks will Generate Revenue on Payments and Checking in the New Era
Having trouble accessing this presentation? View or download or email us at info@ppcgroup.com and we’ll send you a copy.
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:
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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 is a New Era. Restrictions on deposit fees and changes in consumer behavior will have significant impact on DDA and payments revenue.
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How should financial institutions re-think their checking account product mix in light of new OD and NSF fee restrictions?
Over the past decade conventional wisdom suggested that the number of products offered to customers should be reduced. The rationale was that as product selection grew it became harder for consumers to understand the differences between accounts and their pricing, and harder for the sales force to explain their unique benefits. This “paradox of choice”, it was thought, meant that in the face of complexity, consumers became confused and their natural choice would be what they perceived as the least cost option (Free Checking). Want to sell more relationship accounts, the logic went, simplify the product line so the benefit vs. Free checking was more understandable.
But almost 60% of new checking accounts opened were Free anyway.
If you want to improve sales of multiple products, or purchase of add-on fee products, one option is to selectively increase the number of choices. While that may seem counter intuitive (more choice, more confusion?), choosing from a longer menu often results in buyers picking the options presented as best for them. Think of it this way: with only a few choices, most will pick the lowest cost even if they know it may not be the best fit. In its simplest form, give me a choice of only small and large and I’ll choose small. But if you offer small, medium and large, I’m more likely to buy medium.
With a larger array of options, there is an increased tendency is justify the choice of a better product, even if it costs more. The art of the product and pricing mix is to find the right balance between choice and complexity.
It works in restaurants, in computers – and in financial services.
BBVA Compass’s Build-to-Order Free Checking, which can be customized with the addition of up to 7 additional fee based services, is one example of how financial institutions can provide more variations within a framework that offers a more complex product discussion but results in higher purchase of incremental services. On the one hand, this increases the complexity of the product and blurs the distinctions between different checking accounts. It’s not just Free Checking, but a choice of paying monthly fees for multiple incremental add-on services, which might result in equal or higher cost when compared to other products. But from the consumer point of view, this selective complexity creates greater justification to buy the services that are perceived as needed, even if they are not the least cost.
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