The Top Five Retail Checking Trends for 2013


outlook-new.jpg2013 holds much promise and potential for financial institutions (FIs) willing to think, believe and invest in checking product design and delivery that takes into account the top trends shown below. For those FIs that don’t, good luck waiting for overdrafts to make a comeback or for customers to start gladly paying for traditional checking-related benefits.

#1 Customer Friendly  Fee Income Will Continue to Emerge

2013 will mark the beginning of many more FIs deciding to design checking accounts that are so good that their customers will actually want them enough to willingly pay for them. Design previously   employed to devise complicated account terms and conditions that result in customer confusion and unfriendly penalty fees will be rechanneled into innovative design of great products focused on a fair exchange of value with customers for a reasonable monthly fee. This customer-friendly, fair value approach is the only way to generate massive, growing and sustainable fee income in today’s regulatory environment.  

#2 Relationship Building Will Necessitate  a More Engaging Product Experience

The rapid and projected growth of online and mobile banking (e.g. a March 2012 Federal Reserve study) has reduced branch traffic (25 percent over the past five years per consulting firm Bancography). This limits the number of opportunities for customers doing routine, checking-related transactions to interact directly with branch employees and experience firsthand exceptional customer service.

This means the checking product’s inherent value has to step up to play a larger role in building customer relationships. To do this, the checking account’s “customer connection factor” (CCF) will need to be much higher than it is today. In 2013, more and more FIs will realize the growing importance of the checking CCF and design and deliver accordingly. The top FIs are already there.  In 2013, they will smartly integrate applicable retailing best practices like local, mobile and social into their design and delivery. Those that wait to improve the CCF and rely solely on great customer service will regret this decision.

#3 Fixing the Unprofitable Relationships Will Be Required

The primary revenue generators (loans and fees) will continue to struggle to recover in 2013, while operating costs will continue to rise. This stubborn financial pinch will necessitate that FIs can no longer ignore dealing with the approximate 40 percent of their checking household relationships that are unprofitable (and make up only 3.5 percent of total revenue and 2.2 percent of all other deposit and loan relationship dollars). FIs will fix these relationships by actively employing the first two trends and not depending exclusively on the elusive cross-sale. Otherwise, the financial pinch will continue its squeeze and hurt.

#4 Optimizing the Existing Base of Profitable Checking Customers

Just as important as financially optimizing the unprofitable relationships is getting as many of the approximate 60 percent of customers who are profitable to experience your product’s improved CCF. This is the plan to optimize protecting (retaining) and growing existing profitable customers.

The top way to do this is to let them experience checking products with higher CCF than what you offer them today. Getting this done means FIs must also use innovative ways to get these enhanced products into the hands of these customers via unordinary marketing strategies like sweepstakes, contests, satisfaction guarantees, email communication, viral promotion and small business community tie-ins. Free or modified free checking will still be the dominant product strategy (only 9 percent of community banks have gotten rid of it and another 9 percent plan to). The difference maker when it comes to optimizing the experience of your best customers is for products to be better, not just free.

#5 Simple, Simple, Simple Will Win

This has been a trend for many years before 2013 and will most likely continue for years after. There are the three simple things FIs can do to win the retail checking game more in 2013 than in 2012. First, simplify your line-up down to three accounts (two if you don’t offer free checking) and clean up the grandfathered ones. Second, don’t invest in a branch sales report that tracks more than just direct sales, cross sales and referral sales by product that can’t be ranked in terms of sales performance down to the individual employee. Third, your checking-related sales incentive plan must be always on, (not just “on” when connected to a product or marketing campaign) and  explainable and calculable in less than thirty seconds.

Statistics stated are from StrategyCorps’ proprietary database of over two million accounts and polling research of about 100 FI executives.  

Getting Bank Customers to Happily Pay Fees


giving-money.jpgIt seems hard to believe after years of customers not paying for basic bank services due to free checking accounts, there are actually some services many are willing to pay for.

Nearly all bank customers feel basic banking services typically found in checking accounts should be free due to providing the financial institution with low cost funding from account balances. Free checking, the dominate consumer checking strategy over the last decade, has successfully reinforced this feeling.

This sentiment may be changing for a new type of bank services. According to the Integrated Study on Service Fees, which was conducted by San Anselmo, California-based Market Rates Insight in April 2012, and included responses from 1,500 current bank customers and credit union members 18 years old and over, an average of 67 percent of consumers are likely to use and pay for what was identified as “lifestyle financial services” (see table below).

Lifestyle Financial Services

Overall likelihood of use (%)

Identity Theft Alerts

82.5

Credit Score Reporting

73.7

Personalized Couponing

69.2

Overdraft Transfer Service

67.9

Personal Money Transfer

66.2

Mobile Remote Deposit Capture*

63.4

Prepaid Reloadable Cards

47.1

Average All Services

67.1

* Per deposit

 

 

The study states that consumers feel differently about lifestyle financial services. These services have emerged as technology has advanced and personal lifestyle behaviors have changed. The result is a much more acceptable value proposition due to the services embracing increased consumer mobility, personal financial management, informed purchasing, time efficiency, digital identity protection and media connectivity.

So how much are consumers willing to pay for these lifestyle financial services? The study respondents state they are willing to pay an average fee of $3.63 per month for each of these financial lifestyle services.

There is market validation for some of the study’s results already. StrategyCorps, which provides consumer checking account solutions that incorporate some of these lifestyle financial services, has found a material percentage of consumer checking customers do indeed pay for them happily. The most popular services are personalized couponing and identity monitoring/alerts (along with cell phone protection and insurance programs), which are all mainstays of our best performing fee-based checking solution.

Our experience is that the price point customers will pay for these popular lifestyle financial services bundled in the checking account (rather than sold separately) are averaging nearly $6 per month. The typical sell rate is about 30 percent of new accounts (when unconditionally free checking continues to be offered and 60 percent+ when not offered) and 40 percent of existing accounts, when these services are properly designed in the checking account, the account is smartly positioned in the overall consumer checking lineup and product merchandising is aligned with customers’ purchasing behavior.

While customers acknowledge the value in these types of services, our experience is that product design, lineup positioning, and aligned merchandising play a critical role in a customer’s willingness to pay. In other words, these services, despite their inherent value, don’t easily sell themselves like free checking. However, when properly offered to customers, the sales rate is very high.

This means a lot of new customer-friendly fee income at a time when non-interest income at U.S. banks generated from fees on deposit accounts decreased $2.1 billion or 5.8 percent in 2011, the continuation of a five-year trend. Pile on top of this trend line the continuing regulatory pressure on overdrafts and a full year’s impact of the Durbin amendment not captured in the 2011 numbers, and the challenge of getting more fee income without ticking off customers gets even more difficult.

It‘s clear that trying to generate new fee income from just basic banking services is a proposition that customers will not accept. The market has definitively spoken on this strategy.

The good news from the results of this study and StrategyCorps’ proven market experience is that there are fee income based checking solutions that do work in addressing the fee income challenges faced by every financial institution.

Which Fee Income Camp Are You In?


fee-income-squeeze.pngThere’s no debate: Every bank needs more fee income, as do a lot of credit unions. The only debate is how a financial institution is going about meeting this need.

In StrategyCorps’ interactions with hundreds of banks and credit unions, we’ve identified three distinct camps in the need-more-fee-income challenge.

The Do-Nothing Camp. This group of financial institutions seems to be waiting for a sign that this recent decline in fee income will eventually pass. We’re not sure if that means they believe overdrafts are going to make a comeback or the Dodd-Frank Act will be repealed, or are simply in a state of denial over the fee income body blows the industry has been dealt. This camp nearly always seems to have fee income replacement on the to-do list, just not at or near the top, and oftentimes it is easily displaced by other things that are not as hard to deal with.

The “Fee-ectomy” Camp. A fee-ectomy is simply charging a fee for the same thing(s) that have been given away for free for a long time and with no corresponding additional value. As the name implies, the extraction of more fee income from customers on this unfair exchange of value basis is seemingly an easy and convenient way to generate more fee income. That is, until it starts causing significant heartburn for customers, provides negative headlines in the media and prompts the politicians to start politikin’. (Think $5 debit card fee.) This camp is comprised primarily of the larger banks that must feel the industry is basically an oligopoly, given their acceptance and commitment level to this fee income pricing strategy. Unfortunately, the by-product of the fee-ectomy strategy is an increased, or at least an ongoing, level of distrust for all banks that eventually breeds things like “bank transfer day” and unflattering customer reviews on Facebook.

The Back-to-Basics Camp. For years the industry talked about relationship banking, but never got around to doing much about it as the lucrativeness of overdrafts from free checking drowned out such discussion. Now smart financial institutions are genuinely trying to figure out what this means as a way to restore fee income by charging new fees for added value and also trying to cure the thousands of unprofitable accounts rather than firing them with arbitrary and value-less fees. This back to basics camp is approaching the fee income challenge by designing products with new features customers gladly pay for (for example, cell phone protection), marketing in a purposeful way that customers actually notice, creating better connections with customers through customized e-communication and reinforcing product education and sales training to frontline branch staff.

It’s pretty obvious which of the three camps will be the winner here (hint, it’s not the first two). But as those institutions that have adopted a back-to-basic strategy will attest, it’s not the passive way or the easy way. However, with clearly superior financial results and much happier customers, it is proving to be the right strategy for banks and credit unions that genuinely commit prioritized time and resources to addressing this issue.

How Can Retail Branches Become More Profitable?


fishbowl.jpgI have two grown children, 25 and 28 years old, who have checking accounts, but have never been in a bank office.  Yet, despite all the evidence that branch usage is in decline over the past decade, the industry continues to build new offices.  As a director of 10 different FDIC-insured banks during my 25 years as a consultant/investor for the financial services industry, I do not envy the job of current bank directors preparing for the future.  With a large amount of capital tied up in single-purpose real estate and fees on accounts restricted by regulators, where can bank management and directors turn to make the branch profitable again?  The answer to this problem may lie in the historical study of how we got where we are today.  

In the first 10 years of my banking career at Trust Company of Georgia (now SunTrust), I held responsibilities in both management and internal consulting of operations and technology.  I remember going to our Fulton Industrial Boulevard branch on a payday Friday and hearing the branch manager ask, “What can we do to get all these people out of our branches?”  Well, mission accomplished!  These days the long lines on payday are more frequent at a Walmart financial center than at a bank branch.  What will draw these people away from Walmart, check cashers, payday lenders and title pawn shops and turn them back into profitable bank customers? Evolutions in technology, social media and product offerings now provide the solution.

Asset quality disasters, regulatory concerns and other survival issues have consumed the lives of many bankers as of late, leaving little time to pursue the five-year plan.  Banks now must begin to reshape business plans to reflect the evolution in technology and consumer behavior or become the next victim of obsolescence, much like such industries as home entertainment, photography, telecommunications and specialty retail.  Can a full function ATM machine replace a branch the way that a Blockbuster Express self-service movie rental kiosk replaces a store?  Never has the role of a bank director been more important than today; financial institutions must proactively chart a new course for retail banking.  Personal interaction with successful retailers in other industries can provide directors with the needed experience to guide their own companies.  Think of the experience of renting a movie from a kiosk instead of going into a store and compare it with using a full-function ATM instead of visiting a branch.

Now is the time to begin the evaluation of which branches are crucial to the customers in an area, provided all of the other ways that are now available to meet their banking needs.  Given the unlikely event that margins will grow, replacing fee income lost as a result of regulatory changes for most banks is critical to future earnings growth.  Directors need to be proactive in encouraging management to recruit customers that the bank lost to alternative financial services providers, such as check cashers and payday lenders.  To get these customers back, banks must offer a new suite of products and services, which includes cashing checks, money transfer, money orders, prepaid cards, reloadable cards, and fees to guarantee funds. In the future, perhaps a cash advance fee at a bank can replace payday lending.  These services can be highly profitable, as evidence by the large number of alternative financial services providers in the market place. 

An argument usually brought up by bankers is that no other bank is doing this. That’s not true. Regions Bank recently announced Regions Now Banking in all 1,700 branches.  The products mentioned earlier are all included in this offering.  Early results are extremely pleasing to Regions’ management team, which expects the new fee income will replace revenue lost as a result of regulatory changes.

When an industry must react to changes in technology and consumer behavior, the first thing to ponder is if the consumer still needs the product.  Does the public still need financial services?  The answer is yes.  So, how can banks use new technology?  The answer is still evolving, but every bank director who  has purchased something on Amazon, rented a movie from a kiosk, or used the self-service checkout at the grocery store has a personal experience that can be valuable in shaping the future retail bank customer experience.

How to Find the Perfect Match and Make it Successful


perfect-match-puzzle.jpgThe number of wealth management and insurance brokerages purchased by banks last year rose 40 percent to 48 acquisitions, according to SNL Financial. Banks are under considerable pressure with low margins to diversify and increase non-interest fee income. One way to do this is to buy a business that creates some synergies as well as new forms of income. Daniel Bass, managing director of investment banking for FBR Capital Markets & Co., talks about how to go about acquiring fee-based businesses.

What are the most popular fee-based businesses that banks buy?

Insurance brokerage is the first. Trust and wealth management and then specialty lending follow.  Insurance just makes sense because a lot of these smaller banks have clients that are small businesses and they need insurance as part of their business.

What should you consider when shopping around for a good fit?

You don’t buy a company just because it’s for sale. That’s the biggest mistake. When I worked in M&A at Compass Bank, I would call a company. If they said ‘we’re not for sale,’ that was the kind of company I wanted. I didn’t want a firm where someone is looking to retire. I needed someone who was going to work at it.  These deals are different than buying banks. All these deals have an upfront payment and an earn-out payment and you need that because these are people-based businesses. If the sellers don’t work at it and perform, they can’t get the earn-out payment. For example, if I felt a firm was worth $10 million, I’d be willing to pay $7 million upfront and give four years for them to earn $3 million, but give them an opportunity to earn another $3 million if they hit the ball out of the ballpark.

But you could have more problems with cultural fit than buying a bank, right? How do you deal with that?

People love M&A and they like the sexiness of doing deals, but you need to step back and create an internal plan from strategic planning. I’ve had clients decide they want this type of business but when they get to the table, they decide they don’t. 

You have to decide ahead of time the nuances of the business you want. Just in the investment advisory space, there a ton of different nuances. Do you want an asset allocator or do you want a stock picker? If they’re a large cap stock picker, and large caps go out of style, then they’ll lose a bunch of clients. At Compass, we wanted 80 percent of the insurance brokerage revenue in property and casualty (P&C) insurance. You need to figure out what your needs are. If you buy a wealth manager with a minimum $5 million net worth requirement, and all your banking clients are blue collar, than you haven’t done anything.

What kind of profitability should a bank look for? 

At Compass Bank, we didn’t want the business if it didn’t have a 30 percent pretax margin. It has to be better than the bank, otherwise why bother with the hassles?

What are some potential stumbling blocks?

It needs to have buy-in from the top levels of management. Look at the organization’s chart. If this entity reports way down on the organizational chart, it probably is not getting the attention it needs. Those agents will feel like they’re the step child and they will probably leave. If there’s stock ownership for loan officers at the bank, these entities need to be able to participate in that as well.

You need to keep the entrepreneurial spirit with these entities. When you consolidate, you need have a liaison for that business who will try to preserve the entrepreneurial spirit and not change their lives as much as possible. You need to keep these businesses because the more hooks you can put in your customers; the less likely they are to leave. So it’s an offensive and defensive strategy.

What should be done to minimize integration problems after the deal is done?

You need to give it time. Every deal I’ve done, you go through a honeymoon period and then you go through a remorseful period asking, ‘what have I done?’ And then you go through a period asking how are we going to make this work? You need at least two years to get to that third stage. It just takes time.

Boosting Income Without Losing Customers


The Durbin amendment and new overdraft rules significantly cut into fee income, creating more unprofitable accounts. So what should banks and other financial institutions do to generate more fee income? StrategyCorps’ managing partner Mike Branton talks about how financial institutions can increase fee income from these accounts without scaring off profitable customers.

What are banks doing today to get more checking-related fee income?

There are three camps. One camp continues to do nothing. Maybe they think overdrafts are going to make a comeback.

Another camp is doing what we at StrategyCorps call “fee-ectomies”—charging for things banks have been giving away for free or relying on past tactics like balance requirements with penalty fee (maintain a $500 minimum balance or be charged $6). These fee-ectomies are perceived as unfair by customers—paying fees while adding nothing of value. Economists describe this as “an unfair value exchange.”

The third camp recognizes that consumers have been trained to value traditional checking benefits at zero due to free checking; that perceived fairness drives customer reaction to fees; and that you must not make the same checking account changes across the board with no recognition of the individual customer’s existing relationship profitability with the bank. We think the third camp will be the winners financially and with their customers.

What specifically is this third camp of banks doing?

These banks have first found a way to understand which checking customer relationships are profitable and which ones aren’t. Doing this allows for checking account changes to selectively fix the unprofitable ones and protect the profitable ones, rather than a wholesale change that may raise fees on every customer.

Once the banks have this identification and segmentation, the account design changes include adding non-traditional benefits if you are going to add a checking fee. Adding a fee without blending in new benefits results in customers feeling their bank is just greedy by charging for things that have been given away for so long. Think about how you feel about when airlines charge for luggage.

Third, once banks have determined the precise checking account changes to each customer segment, they should communicate these changes clearly and directly to each customer with an “upgrade” message rather than a “we need more fees but aren’t providing you any more value” message. And they train their branch personnel to understand how these changes are truly fair for the customer, so they can deal with inquiries from customers about those changes.

In a nutshell, these three things are what StrategyCorps does for financial institutions.

So I guess you don’t agree with banks or thrifts charging fees for the use of a debit card at $4 or $5 per month?

It’s insane. You’re taking the number one most convenient, most popular way that customers want to pay for something and now you start charging a usage/penalty fee for that card right at the time you need significantly greater transaction volume? This negative reinforcement won’t work and there’s consumer research showing 80 percent to 90 percent of consumers oppose this idea and 20 percent to 30 percent will change banks over it.

With the Durbin amendment (which caps debit fees at 21 cents per transaction for banks above $10 billion in assets), banks have to make it up with volume. So incentivize customers to use it more. We’ve designed our products to do this and are seeing transactions at least double. Charging a fee is going to not only tick off customers but also cause material account attrition that will offset significantly any fee lift.

Aren’t there going to be a lot of customers who say, “I don’t want to pay for a checking account?” Won’t a large number of people call the bank and say, “I don’t want the five dollar account, give me the free one?”

Actually, no. We understand this expectation and concern here by bankers, but we’ve done this account upgrade process hundreds of times. The reality is there is no appreciable negative response and minimal incremental attrition if you incorporate a fair fee-based account.

Doing this will get banks more fee income annually per account—the range is between $60 and $75—from unprofitable accounts, which is usually 40 percent to 50 percent of all checking accounts. Do the quick math; this is a significant number. The financial reward far outweighs the risk of losing accounts that were costing the bank money anyway.

And for the profitable accounts, there are several ways the relationship can be protected with this kind of “fair and upgraded” account strategy that significantly reduces their attrition risk.