Why Your Checking Accounts Must Be More Relevant

Strategy_Corps_2-14-13.pngThere’s no debate, the way your customers interact with checking accounts is rapidly changing – dramatic growth in mobile banking fueled by remote deposit capture, continued growth of online banking, and traditional and non-traditional competitors offering alternatives like prepaid cards. Plus, nearly half of consumers check out a bank online before visiting a branch and more and more use social media for expected customer service.

One significant outcome of this is branch traffic steadily declining about 5 percent per year on average, according to Birmingham, Alabama-based consulting firm Bancography. So the number of times your customers and prospective customers interact face-to-face with your employees to experience award-winning, competitively differentiating customer service is decreasing.

This means your bank’s hub deposit-based product, the consumer checking account, must deliver much more stand-alone appeal and built-in value to connect with customers differently and better than in the past for your bank to remain relevant in their lives. So you have to think about the importance of this customer interaction with checking accounts differently than you have in the past.

An interesting way I’ve heard this product relevance explained by a banker is from Ray Davis, CEO of Umpqua Bank, during a keynote presentation at the recent Acquire or Be Acquired Conference. Davis stated the situation this way—banks must find a way to have their customers positively think about their bank when they’re not in the branch interacting with a bank employee.

At StrategyCorps, we think about this a bit differently, yet with the same intended result. Our position is banks must provide a checking account that is so appealing, so good, and so applicable to a customer’s everyday financial activities that the customer would gladly be willing to pay for that checking account. We all know that when you pay for something, you care more about what it delivers. And if it delivers at least what you pay for it (and hopefully more), then that’s a fair exchange of value upon which to build a mutually rewarding, loyal relationship.

So exactly what does such a checking account need to offer to be more relevant? The starting point is the account offers a benefit(s) that naturally fits into a checking account and doesn’t cost so much that the price the customer pays for it is unreasonable. Remember, there’s still enough free checking out there that it remains a reference point in a purchasing comparison by consumers. In other words, it’s highly unlikely that a lot of consumers will pay $25 per month for a checking account, no matter how valuable the benefits it provides when free checking is a viable alternative in the marketplace.

Free checking has also trained consumers to strongly believe that traditional checking benefits need to be free, no matter the amount of intrinsic value of those benefits. So you have to think creatively and differently about how you design your accounts, meaning the inclusion of non-traditional benefits.

Now I know there are some of you who may be shaking your head in disagreement or disbelief or confusion, which is okay. However, the winners of the consumer checking game will be those banks that embrace the fair exchange of value requirement and figure out which non-traditional benefits need to be offered that make checking accounts more relevant to their customers, no matter how those customers decide to actually interact with your bank.

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


Credit Score Reporting


Personalized Couponing


Overdraft Transfer Service


Personal Money Transfer


Mobile Remote Deposit Capture*


Prepaid Reloadable Cards


Average All Services


* 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.

If $5 Foot-Longs Sell, then Why Not $5 Checking Accounts?

sandwich.jpgYou may have recognized that Subway is running their $5 foot-long sandwich campaign again. (Are you like me, once you hear that jingle, it’s almost impossible to get it out of your head?)

So while I was humming this jingle, this got me thinking—why are consumers willing to pay $5 for an average foot long sandwich ( I don’t claim to be a sandwich connoisseur or even a sandwich “artist,” but I eat plenty of sandwiches and put Subway’s in the average category at best), yet are extremely/ violently reluctant to pay a similar amount monthly for a checking account? The checking account, after all, provides a tremendous amount of security, access and convenience when it comes to doing a financial transaction with a third party.

Looking beyond, but not overlooking, the overall consumer sentiment that one should not have to pay for access to use one’s own money, what strikes me is that consumers don’t see the offering of a “good deal” as benefit of a checking account.

Part of this is brought about due to the utter domination of free checking for the last decade or so, which has numbingly conditioned consumers that checking and all things checking-related should be free. But another big part of this is because banks and credit unions haven’t put a “good deal” in their checking accounts in terms of account benefits that help the consumer save money when they have to spend it. And they won’t promote it like they should to let their customers know they have a “good deal” in their checking product. In essence, that’s what the $5 foot-long sandwich does. It saves a consumer a buck or two when they have to spend it on lunch or dinner. And Subway uses it effectively as part of their customer connection/engagement strategy.

It seems that with the success of daily-deal companies like Groupon and LivingSocial, and the all-time high usage rate of coupons, paper and electronic, by consumers of all demographics (even the affluent), that banks are reluctant to include or promote these kinds of discounts as a checking account benefit. It’s easy to calculate a tangible dollar savings here and let’s face it, saving money on a sandwich or an oil change or on a hotel room is much more appealing and competitively different than a discount on a safe deposit box or free cashier’s checks.

At a time where there’s no debate that every bank and nearly every credit union needs more fee income and that the public won’t readily accept fee income that is not customer-friendly and adds no incremental value, it is time to re-think the benefits that consumer checking accounts’ delivers to consumers.

If you can successfully figure this out then you might hear folks humming, “five dollar…, five dollar…, five dollar checking accounts.” And if your financial institution could sell a just fraction of these compared to the number of $5 dollar foot-longs sold, you would be well on your way to finding fee income that is getting smaller and smaller every month.

What’s Next for Consumer Checking after Durbin?

checking.jpgThe two major checking-related fee income sources have been the targets of regulation. Durbin will decrease interchange fees by about 45 percent (44 cents per average transaction down to 24 cents). Sure, there’s still uncertainty regarding the exclusion for financial institutions with less than $10 billion in assets, but even the most optimistic banker will concede that interchange fees will not be at levels where they’ve been before. Add to that, the estimated financial impact of FDIC and OCC overdraft guidance – a reduction of an additional 15 percent to 25 percent on top of Reg E’s first year negative impact of about 10 percent to 20 percent. So, checking account products and pricing will have to change to adapt to these new rules.

These changes to replace lost fees won’t be popular, given overall consumer sentiment towards banks these days. This challenge is compounded by the fact that free checking has convinced consumers that traditional checking benefits aren’t worth paying for. In the minds of many consumers, since banks have been able to financially justify not charging for these benefits for the last decade or so, no longer doing so is just another “fee grab” by greedy banks.

This means the easy and convenient changes like starting to charge fees for the same benefits that have been free or instituting certain requirements, like minimum balances to avoid penalty fees, is a risky move. It will anger customers, especially the most profitable ones, and chase many of them away to competitors. Plus, history has proven that these kinds of checking changes will generate only a fraction of the revenue that needs to be replaced.

Banks must make changes to their retail checking accounts to incorporate a fair exchange of value with customers. This means an upgrade in what they get when their bank begins charging fees for services. Sorry to sound like a broken record, but charging fees for benefits that customers haven’t paid for in the last decade or adding requirements to avoid a fee is a tough sell, and just defaulting to this approach will be unproductive at best.

So smart banks see the post-Durbin world of checking as an opportunity to launch innovative checking products-including adding non-traditional checking benefits deemed worthy of a charge, such as local merchant discounts and identity theft protection. And look for pricing strategies that simply and immediately reward customers by reducing checking fees based on desired banking behaviors from customers that don’t revolve around minimum balances. This differently defined “pathway to free” will replace the traditional free checking account, which will be hard to justify in the future from a profitability standpoint.

Community banks will still offer free checking, and here’s why

money-checks.jpgAt the biggest banks in the country, free checking is becoming a little less free.

  • Pittsburg-based PNC Bank, the fifth largest bank in the country by deposits, was the latest to whittle away its free checking account last week. Customers will no longer get reimbursed for out-of-network ATM fees if they don’t maintain at least a $2,000 average daily balance and they won’t rack up points for rewards on a PNC Visa credit card. But PNC Bank has decided to keep free checking, for now.
  • Bank of America hasn’t had no-strings attached free checking in years, according to a spokesman for the bank.
  • Wells Fargo & Co. did away with it in July of 2010. After acquiring Wachovia in 2008, Wells Fargo has been getting rid of free checking for Wachovia on a state-by-state basis as it consolidates the two banking organizations.
  •  Citigroup doesn’t have free checking for new customers, either.

With Congress regulating away tens of billions in fee income from banks in the last couple of years, including a rule that will slash large bank interchange income on debit cards by as much as 85 percent, banks are looking to do away with unprofitable deposit accounts.

Mike Moebs, an independent researcher who tracks account activity for bank clients and federal organizations such as the U.S. Government Accountability Office and the Federal Reserve Bank of Chicago, says the move away from no strings-attached free checking at big banks is opening up a lucrative way for community banks to steal customers from the big Wall Street and regional banks.

Most of the nation’s smaller banks and credit unions still have free checking, he says. They have smaller operating costs than big banks, so they can afford to keep offering it, he says. The average cost of a checking account is about $200 to $250 annually for a community bank, Moebs estimates. That’s compared to a cost of about $350 to $400 for a big bank, which has more branches, more employees and tends to operate less efficiently, he says.

Moebs estimates banks with more than $50 billion in assets controlled 45 percent of all checking accounts as of 2009, but that will drop to 35 percent by the end of this year, he says. That’s a loss of about 13 million checking accounts that will migrate to smaller banks and credit unions, he says.

Some credit unions have even added free checking to take advantage of that switch, Moebs says, going from 75 percent of all credit unions offering free checking in July of last year to 84 percent last month.

Banks with fewer than $50 billion in assets stayed about the same since July, with 62 percent of them offering free checking. Only about half of big banks had free checking last month, down from 64 percent last July.

Moebs said smaller banks can make free checking pay by selling other products such as automobile loans or mortgages. They also can attract small business owners, an important clientele for community banks, using the free personal checking account to nab their loan business.

While community banks may end up stealing some customers from big banks with free checking, the convenience of branch banking still will be a significant hurdle to overcome. A recent survey by J.D. Power and Associates found that advertising and branch convenience remain top concerns for customers looking for a new bank, and fees play a less important role.

Plus, big banks may succeed in holding onto the vast majority of deposits, even as they lose account holders who kept small amounts of cash in the bank.

Free checking may help community banks steal some customers. But it won’t make them profitable. That’s up to the bank.