With Congress wiping out billions in fee revenue, many banks are revamping their checking and savings accounts in a high-stakes bid to recover at least some of that lost income.
The Boston Consulting Group estimates that the U.S. banking industry will lose $25 billion in annual fee income as a result of regulatory changes that include the Credit Card Act of 2009, restrictions on overdraft fees in Regulation E, and the Durbin Amendment, which aims to cut interchange fees on debit cards.
With the regulatory shake-up amounting to a strip-down of bank fees, one way banks are coping is by rolling out more “relationship” products that reward profitable customers who buy multiple products and services, and giving a little nod goodbye to the money losers. With the indirect subsidy of overdraft and interchange fees now greatly reduced, checking and savings accounts must stand on their own profitability.
None of the top four largest banks in the country have free checking anymore.
Wells Fargo & Co. got rid of it in July of last year. The most basic account, called “value checking” now costs $5 per month, unless customers meet certain requirements such as direct deposit or an average daily balance of $1,500. All other accounts cross promote other Wells Fargo products, according to spokeswoman Richele Messick. Wells Fargo offers a bonus interest rate on its savings account for customers who also have a Complete Advantage checking account. As of early March in Massachusetts, that savings account bonus rate was a 15 basis point annual yield.
Citigroup Inc. also has begun offering more incentives to customers who buy multiple products or services. Last fall, the banking giant started giving customers free checking with no minimum balance if they did a combination of five transactions regularly, including direct deposit, to encourage customers to use Citigroup as their primary bank.
There’s nothing new about relationship banking, but banks are rolling out more incentives and tracking the profitability of accounts more closely, say consultants who are working with banks to revamp their deposit accounts.
Gone are the days when banks offered a mortgage discount to anyone with a checking account, which just led customers to open empty checking accounts, says James McCormick, president and founder of First Manhattan Consulting Group in New York.
To qualify for the new “platinum privileges” program, which Bank of America is piloting in three states and plans to roll out nationwide later this year, customers need to have $50,000 in a combination of linked accounts, such as checking, savings or an investment account at its Merrill Lynch & Co. subsidiary.
In exchange, the bank promises certain perks, such as higher yields on CDs and money market accounts, plus expedited service on its toll-free line.
The pilot, which includes four different kinds of checking accounts, is in Georgia, Massachusetts and Arizona.
Such accounts are becoming more prevalent. As of January, 31 percent of all deposit products required multiple “relationships” with the bank, up from 28 percent in January of 2010, according to San Anselmo, California-based Market Rates Insight.
“We are seeing a shift from hot money to warm bodies,” says Dan Geller, executive vice president at the firm.
Regulation is not the only factor driving the move to relationship accounts; so is the renewed emphasis on building core deposits as a stable source of funding.
When there was a lot of lending going on, banks needed lots of deposits, and any deposits would do. With less lending activity nowadays, there is more pressure from regulators and investors for banks to build a base of customers who are going to stick around for a while, according to Andy Gibbs, a bank consultant with Mercer Capital in Memphis.
Regulators are looking askance at brokered deposits, wanting banks to beef up their core deposits from solid savings and checking account customers who won’t bolt for a higher CD offer elsewhere, Gibbs says.
But how can relationship accounts improve profitability?
JPMorgan Chase & Co. estimates the Durbin Amendment’s reduction in debit card fee income for banks will cost it $1.3 billion and make about 1.3 million of its customer households unprofitable.
So it has been making changes.
JPMorgan’s Charlie Scharf, retail financial services chief executive officer, said during an investor day conference in February that the bank converted about eight million free checking customers to a fee account, stopped offering debit rewards, and eliminated debit usage was a way to waive the monthly fee for new customers. Scharf estimated that about 15 percent of the bank’s customers are in less affluent households who will no longer qualify for free checking.
However, relationship banking pays, he said. A JPMorgan customer with both a checking account and a mortgage is about 30 percent more valuable to the bank than a checking customer without a mortgage, and also 54 percent less likely to close the checking account.
This is the kind of focus on profitability we haven’t seen the last 10 years, when banks were more focused on volume, says Mary Beth Sullivan, a managing partner at Capital Performance Group in Washington, D.C., a bank consulting firm.
“The banks always talked about relationships and how important they were but didn’t make it clear to the customers how they benefited from that,” she says.
Banks are restructuring deposit accounts to reflect the new emphasis on relationships, but each bank is experimenting with different accounts, says McCormick. That is different from the last 20 years when almost all banks had a free checking account model that relied on overdraft fees for income, he says.
“A big question is what will resonate with customers more?” says First Manhattan vice president Andrew Frisbie. “The industry has a great experiment underway and it will be really interesting to find out what happens with it.”
Maverick at the Kansas City Fed
It’s not every day a banking regulator is willing to stand up in front of a crowd and attack the political power and size of the nation’s largest banks. But Tom Hoenig is.
The bespectacled Federal Reserve Bank president in Kansas City gave a speech in February to a professional group called Women in Housing and Finance in Washington, D.C., where he said the U.S. financial system is in worse shape than before the financial crisis, because financial reform not only failed to solve the “too big to fail” problem, it made it worse.
He called for a breakup of the big banks and questioned the very ability of bank regulators to successfully regulate, given the complexity and political clout of the nation’s largest financial institutions.
Part of the problem, he says, is that investors and big company executives assume the government will continue to bail out failed institutions, encouraging them to take on greater and greater risks.
“In the United States, we observe with each crisis and market collapse that policymakers consistently intervene to protect an ever broader group of creditors and investors from loss,” he said.
Hoenig said that when the Gramm-Leach-Bliley law was passed in 1999, allowing banks to expand into securities and insurance businesses, the top five banks controlled $2.3 trillion in assets, or about 38 percent of the banking industry as a whole. Currently, the top five now have 52 percent of all the banking industry assets and one institution, Bank of America Corp., is as big as the top five were more than a decade ago.
Hoenig, who retires this year, is not alone in his critique, aspects of which have been voiced by Nobel Prize winner and former President Clinton economic advisor Joseph Stiglitz, and former chief economist for the International Monetary Fund Simon Johnson, among others.
But Hoenig was the lone dissenter last year at every meeting of the Federal Open Market Committee, where he criticized Fed chairman Ben Bernanke’s policy of keeping interest rates rock-bottom low, (Fed presidents rotate serving on the FOMC, and this year, he no longer serves).
Hoenig’s critics have challenged the wisdom of raising interest rates during a time of high unemployment and some have questioned the feasibility of breaking up big banks without hurting the economy.
Still, he’s gotten support from his board in Kansas City, which appointed him, leaving Fed chairman Ben Bernanke out of the equation.
“I’m an independent businessman, and my experience from talking to people in my state and in my region is there’s a strong opinion that (Hoenig) is right,” says Mark Gordon, a Wyoming rancher who sits on the Kansas City Fed board. “I know the board supports him in that view.”
A spokesman for Hoenig declined an interview request for this story.
Previous Fed bank presidents have voiced contrarian views as well. Gary Stern, then president of the Federal Reserve Bank in Minneapolis, co-wrote a book in 2004 called: Too Big to Fail: The Hazards of Bank Bailouts.
“Too big to fail is an important problem and needs to be discussed,” says William Poole, who spent 10 years as Federal Reserve Bank president in St. Louis, and retired in 2008. Poole tried to draw attention to size of Fannie Mae and Freddie Mac while he was in office, arguing that those government-backed mortgage companies’ obligations rivaled the size of the U.S. Treasury.
The effort didn’t much attention. This time, Hoenig’s supporters hope other leaders will pay attention.
“He’s willing to be a maverick and ruffle some feathers,” says Mark Calabria, the director of financial regulation studies at the conservative Cato Institute. “I think he thinks there is too much at stake to play nice.”