2013 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
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.
PwC’s Shivali Shah explains how our Experience Radar research is different from other customer experience models. Despite many threats to profitability, retail banks have rich opportunities for growth. Customers will pay for banking experiences they value. The challenge lies in delighting customers through experiences they value rather than exhausting resources on offerings they ignore.
The U.S. banking industry is drowning in deposits and that’s not necessarily a good thing. As of June 30, deposits in U.S. banks (but excluding credit unions) totaled $8.9 trillion, up nearly 8.5 percent from June 30, 2011, according to the Federal Deposit Insurance Corp. Total bank deposits have actually increased every year since 2003, although the increase from 2011 to 2012 was the sharpest jump over that time.
There’s no great mystery why this is happening. The U.S. economy’s uncertain outlook and a volatile stock market has led many consumers and businesses to park their investment funds in insured deposit accounts rather than risk losing a big chunk in another market meltdown. Normally banks would be quite happy to have a surfeit of low-cost deposit funding, but it’s actually something of a mixed blessing nowadays. Slack loan demand and low rates of return on investment securities like U.S. Treasuries, the latter a direct result of the Federal Reserve’s easy money policy in recent years that has kept interest rates low, are making it very difficult for banks to earn a decent return on all those deposits.
What makes this multi-year increase in deposits so interesting is that it has occurred at the same time banks have been closing branches and pruning their networks. As of June 30, according to the FDIC, there were 97,337 bank branches nationwide, down from a high of 99,550 in 2009, and there has been a consistent year-over-year decline since then. There’s no mystery why this is happening either. Two seminal events since 2010—new restrictions on overdraft charges and a cap on debit card fees—have taken a big bite out of the profitability of most retail banking operations and banks have responded by cutting costs, partly through layoffs but more so through branch closings. That deposit levels have continued to rise, even as the number of branches has declined, has no doubt made it easier for banks to trim their brick-and-mortar networks.
But here’s the rub. What happens if in a few years the U.S. economy makes a strong comeback and retail investors are once again confident enough to put their money into the stock market? Banks don’t have to compete with the stock market now for consumer funds, but they would in that scenario. Most banks have developed multi-channel distribution systems with the traditional branch as the hub and alternatives like automated teller machines, in-store branches, the Internet and more recently the mobile phone as spokes. And while remote channels like online and mobile have steadily grown in popularity in recent years, how effective will they be as deposit gathering tools if banks must once again compete for funds?
Here’s my best guess at what the future holds: Don’t be surprised if, say, five years from now the trend has reversed itself and banks are once again opening new branches. It might be like a relic of days gone by, but a deposit war between Main Street and Wall Street would be just the thing to give the hoary old bank branch a new lease on life.
Many bankers are nobly searching for the perfect consumer checking line-up: One that connects better with customers, is more financially productive, differs dramatically from the competition and meets the changing needs of customers.
In that search, there are a lot of factors to consider, including macro and micro market segmentation, an array of home grown ideas and third-party solutions, a myriad of consumer buying trends and personal preferences, plus a lot more too lengthy to mention. It’s enough to make your hair hurt.
So, is there such a thing as the perfect consumer checking line-up? And if not, what should you focus on to get as close as possible to the perfect checking line-up?
From my standpoint, there’s not a perfect line-up today that every bank can “plug and play.” Rapidly changing technology, evolving consumer behaviors, individual financial requirements of a particular financial institution, and most recently the fluid checking-related regulations all make a perfect line-up impossible.
To get close to the ideal of a perfect line-up, I suggest you subscribe to an “easy as 1-2-3” way of thinking, deciding and then doing.
The first 1-2-3 will work no matter your financial institution’s situation because it is consumer-centric and not bank-centric. So start your thinking here and you’re on your way:
Understand how consumers really choose a checking account.
Make the line-up as simple as possible to make it easy to buy and sell.
Make the products as good as you possibly can so you’re not only competitive but also have at least one account your customers will happily pay for.
Once you have these as your guiding principles, let’s focus on each one individually.
Consumers choose an account based on their buyer type. So here’s the second 1-2-3, the three types of buyers:
A Fee Averse Buyer – This buyer wants free checking if it’s available or the cheapest account you offer.
An Interest Buyer– This buyer wants the best yield possible on their deposits and expects a market yield or above market yield.
A Value Buyer – This buyer wants the best account at your institution, is most focused on account benefits and is willing to pay for the account if there’s a perceived fair exchange of value.
Your branch bankers’ product knowledge or your online merchandising message will play a significant role in helping customers decide which type of buyer they are. Top-performing retail financial institutions know this stone cold. They don’t automatically assume nearly every customer is a fee adverse buyer because they’re not. About 50 percent are. Value buyers make up about 40 percent. And in today’s interest rate environment, about 10 percent are interest buyers.
Once you understand how your customers choose checking accounts, what type of accounts should you offer and how many? The answer is the third 1-2-3. For line-up simplicity and ease of buying and selling (and the sanity of your customer and your branch banker), there are only three types of checking accounts you should offer:
A No/Low Fee Account
An Interest-Bearing Account
A Value-Based Account
Of course, the most common no-fee account in today’s market place is unconditionally free checking. However, more and more institutions are now offering free checking with conditions, that is, free if a simple condition is met, like getting e-statements instead of paper ones or keeping a minimum balance. If this condition is not met, then there’s a penalty fee, which is sometimes modest and at other times extremely penal for the value received.
For the interest account, customers still want as much interest as they can get (which isn’t a lot these days) and feel like the higher the balances they keep in the account, the higher the interest rate should be. Here we find a tiered-rate account with interest beginning at a stated (reasonable) balance level rather than from the first dollar. This rewards and encourages higher balances for these buyer types while letting you manage your interest expense.
The value account is one that’s not as easy to design. Having only basic checking services and charging fees for them is risky. So there is the need to enhance the value account beyond the most basic checking services. And consumers have stated in studies and in their buying actions that they will happily pay for selected non-traditional checking account benefits. (See my earlier article on BankDirector.com, “Getting Bank Customers to Happily Pay Fees.”)
If designed right, this value account can generate significant, customer-friendly revenue of at least $75 per year from about 40 percent of your customers.
So while there’s not a perfect line-up that’s an easy “plug and play” into every financial institution, you can get very close to it and produce great results by following the guidelines mentioned above.
If you think about the people in your life that you are closest to, chances are they’re the ones that you’ve shared the most experiences with. Those experiences build the involvement needed to grow relationships—between people and also between people and brands. Because there are few things as personal as money, banking is an industry that has a huge opportunity to engage people in experiences that build lasting and mutually rewarding relationships. Yet it’s a segment that has low satisfaction rates (44 percent were extremely or very satisfied with their bank in an October 2011 Harris Poll).
To better understand the opportunity, we commissioned a study on people’s attitudes toward their bank and most importantly, how they felt their bank felt about them.
One big discovery is the difference between the way people feel about their bank and how they perceive their bank feels about them. About 39 percent of people surveyed feel indifferent toward their bank—they neither like, love nor loathe it. But when asked how they feel their bank feels about them, 54 percent feel their bank is indifferent toward them and another 6 percent feel their bank loathes them. I doubt there are many human relationships that could survive under that scenario.
When asked how open to switching banks people were, 30 percent said they are very likely or indifferent/open to switching—that means nearly a third of customers are vulnerable on any given day. A Harris Poll looked even worse for the bigger banks: 46 percent of JP Morgan Chase & Co., 40 percent of Bank of America Corp. and 54 percent of Wells Fargo & Co. customers are extremely or very likely to change their bank. When you consider an American Bankers Association study found that it’s seven times more expensive to replace a customer than to keep them, it seems that the opportunity and the need to build stronger relationships is very real.
Here are five ways banks can build mutually rewarding customer relationships and become a champion for them:
Champion customer needs by focusing conversations on “what they want to do” rather than “what we have to sell you” which just furthers the feeling that the customer doesn’t matter. Banks can rewrite the language used by everyone in the bank to reflect the needs and the power of their customers. One example is Opus Bank. The bank was founded on the belief that strong businesses build strong communities and everything they do supports people with the vision to drive job growth, including their tagline, which is a call to “Build Your Masterpiece.”
Give people credit for knowing how they like to use their money by creating a culture of choice that allows people to customize their accounts and services. While many aspects of financial products are regulated, banks could let people choose the other services they value. Where one person might value free wire transfers, another might prefer something entirely different.
Be a valuable resource that champions people’s desire to do something with their money. Think Nike+ for money. Offer financial management tools that help people set goals, track their progress using their account data, and get rewarded for their achievement. This could be a great opportunity to tie in commercial banking partners like retailers and restaurants in each geographic area. We are beginning to see new banks (e.g., Simple) emerge that leverage technology to not just make transactions easier but to actually empower the consumer.
Create communities for customers to share financial advice with each other and with the bank. Banks can show that they embrace customers as people (not just their money) by adopting the behaviors of sociable people, i.e. by being accessible, interested in what people have to say, and providing inspiration to help them achieve what they want to with their money. Regional banks like Umpqua Bank have done a great job of using technology to create a personal touch outside the bank. In contrast to the 98 percent of social media commentary about banks that is negative, theirs is 99 percent positive and almost to the point of fostering a “my bank is better than your bank” pride.
Empower employees to act in the best interest of their customers and reward them based on their personal contributions to the relationships they have. This is particularly important as customers switch to online banking and each interaction takes on more importance.
While creating these kinds of experiences may not directly sell more banking products, they have real business value. They build involvement with your customers and that involvement will lead to deeper relationships that are more mutually rewarding and profitable.
It 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
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.
Hybrid seems to be the new word these days. Hybrid cars get better gas mileage. Why not apply a hybrid to your business model? As many of you, I grew up hearing that I didn’t need something new every time I asked, and I could make do with what I had. I guess those core values stuck because I don’t necessarily think that you have to have an all or nothing proposition for your lockbox product offering. You may already have an established customer base with a group of talented people who do a great job—so why would you take all of that and outsource it? If you have the desire to enter into new markets such as healthcare or property management and don’t want to incur the expense of building out a new facility, an option exists and is in play today. By taking a hybrid approach, a blended style of outsourcing, financial institutions have more options than ever to consider.
With a hybrid approach, you decide what you want to remain in control of and what you want a partner to help with. Here are a few examples of hybrid outsourcing to consider:
1. The healthcare market is a large revenue opportunity for financial institutions. There are hundreds upon thousands of healthcare providers right outside your door, but processing those payments can be complex. There is everything from high tech scanning and data recognition to fully compliant with HIPAA (Health Insurance Portability and Accountability Act) archive and data exchanges. Don’t be overwhelmed and walk away from this potential revenue. By partnering with an organization that has the expertise you need, and will be your product innovator, marketing department, billing and finance and operational arm, you are able to offer a new service to a new customer group without changing anything within your core operations.
2. Accept all payment channels. We all know there are several new and emerging payment channels that customers prefer using—but can your financial institution accept them all? With an integrated receivables hub, offered through an outsourced model, now you can.
3. Expand your geographical footprint. Do you want to grow your financial institution without the expense of brick and mortar costs? Your financial institution can gain access to a unique capture network that allows you to capture and process payments from just about anywhere.
By simply adding on to what you have today, a new hybrid approach can give you happier customers, more revenue, expanded geographic footprint and a happy chief financial officer.
Deloitte, a professional services firm specializing in audit, tax, consulting, enterprise risk, and financial advisory services, recently released a report on the unbanked, with excerpts printed here:
A Large Untapped Banking Market?
Financial institutions around the world compete against one another trying to attract and retain the same middle- to upper-income retail customers year after year. Yet there is an enormous market that most banks are ignoring—and that nonbank competitors have begun to cultivate effectively: the world’s 2.5 billion adults who are either unbanked or underbanked.
By definition, unbanked customers have no checking, savings, credit, or insurance account with a traditional, regulated depository institution. Meanwhile, underbanked customers have one or more of these accounts, but conduct many of their financial transactions with alternative service providers, such as check-cashing services, payday lenders, and even pawn shops—and still use cash for many transactions.
Prepaid Cards and Mobile Payments: Recent Innovations Gaining Rapid Acceptance
The developing world is serving as a crucible of innovation for a new payments infrastructure for financial services — one that relies less on the physical presence of branch offices and more on wireless telecommunications and the Internet.
Prepaid cards. Like the holiday gift cards that have become so popular in the United States, general purpose reloadable (GPR) prepaid cards are a medium of stored value. However, gift cards are typically “closed loop” products accepted by a single merchant, while GPR prepaid cards are “open loop” and accepted almost everywhere.
Prepaid cards can offer unbanked and underbanked consumers access to online shopping and bill payment, as well as a host of other traditional banking functionalities. Moreover, many governments around the world are increasingly adopting prepaid cards as a preferred mechanism for making benefits payments to consumers because it can be cheaper, faster, and more secure to transfer funds to cards than it is to mail checks or provide cash to all recipients.
Mobile payments. At the same time that prepaid cards are taking off, payments made through mobile phones are also becoming more common. According to the International Telecommunication Union, the United Nations agency for information and communication technologies, there were 5.9 billion mobile-cellular subscriptions in the world at the end of 2011. With a global reach of 87 percent—and a developing-world adoption rate of 79 percent—mobile phones are in use almost everywhere and by virtually every consumer segment. With such widespread access to mobile technology, consumers in Africa, Asia, and other emerging markets can pay bills, get cash from local merchants, and send money back home to their families—without having to step into a banking office.
The United States: An Emerging Market for Prepaid Cards
In the United States, a number of prepaid program managers are increasingly positioning their GPR prepaid products as a checking/debit alternative and targeting them to both the unbanked and underbanked population as well as presently banked consumers.
Prepaid cards can appeal not only to younger consumers looking for a cheaper, more convenient alternative to traditional banks, but also parents eager to control, compartmentalize, and track their children’s spend or their own.
Emerging online banking players are offering a broader product array, including savings and credit accounts to complement their prepaid offerings. Adding to the pressure, several established nonbank players and several large retailers have introduced everyday payment prepaid cards with fewer fees aimed at younger consumers and the cost-conscious segment of the market.
Responding to New Competitors
Stay the course and reduce operating costs. Some banks may elect to continue to grow their share of wallet among existing profitable customers while further reducing operating costs in-line with the new reality of regulatory constrained fee income.
This option is a traditional response of large incumbents when faced with disruptors. It also is a well-established playbook and might make the most sense for many banks. This option will likely require forcing out unprofitable consumers and will shrink the total consumer franchise. Typically, large national banks seem to have chosen this option, either due to a profitability imperative or to a strategic choice to focus on the affluent. Some regional banks have made a similar choice as well. The shallow profit pool of existing prepaid customers is also a common reason cited for this choice.
Protect the franchise. Other banks may decide to offer prepaid products to unprofitable checking/debit consumers, migrate them to the cheaper prepaid platform, and offer prepaid options to less creditworthy customers.
This approach will likely preserve the size and scale of the franchise and preserve the future option of migrating prepaid customers to traditional banking products as their financial situation improves. Banks that are more comfortable with middle-income and subprime customers as well as regionals looking to grow aggressively are considering this option. The risks associated with this option are a dilution of efforts and the traditional risks associated with middle-of-the-road options.
Embrace the disruption. Still other banks may choose to create an enterprise-level focus on the unbanked and underbanked markets initially around prepaid offerings and actively prepare for the upward march of this new banking solution. Of course, this option can be especially attractive for banks in fast-developing markets where the non-consuming segment is 70 percent or more of the population.
Traditional banks could acquire one of the prepaid specialists or create their own program-management capability. The upward march would involve migrating the product functionalities and positioning to help meet the needs of selected banked segments, whether lower-middle class or younger affluent segments that do not want or need traditional banking relationships.
Following the financial crisis, one can cite any number of areas where the regulatory pendulum has swung too far. Retail banking is one of those areas. The Dodd-Frank Wall Street Reform and Consumer Protection Act ushered in a new—and an oddly schizophrenic—regulatory regime for retail bankers.
The premise of the new legislation is that, had the prior retail banking regulatory regime been different, material aspects of the financial crisis would have been averted. In particular, proponents of the legislation asserted that federal bank regulators focused on safety and soundness considerations significantly to the exclusion of consumer protection.
Whether these problems were real or imagined, they were given a legislative “solution.” Dodd-Frank created a new federal super-regulator for consumer financial services regulation, the Bureau of Consumer Financial Protection (CFPB). With generous funding and a singular focus on consumer protection without regard for prudential considerations, the CFPB has a host of unprecedented powers, including:
rulewriting authority for 18 federal consumer credit laws;
authority to issue rules implementing the new consumer protections added by Dodd-Frank, most notably the statute’s open-ended proscription on unfair, deceptive or abusive practices;
direct compliance-related supervisory authority for banks with total assets of more than $10 billion.
In other parts of the Dodd-Frank legislation, however, Congress seems to have forgotten that the CFPB was the “solution” to the perceived problem of lax federal oversight. Notwithstanding the CFPB’s creation, Dodd-Frank ushers in a wholly separate alternative “solution.” Specifically, Dodd-Frank increased state enforcement authority. State attorneys general, in particular, in effect have been deputized to enforce aspects of federal consumer financial protection law. Dodd-Frank also erected an array of barriers to federal preemption, the principle by which banks that operate on a multi-state basis often are permitted to follow a single uniform federal standard rather than a hodgepodge of different and potentially inconsistent state laws.
Although federally chartered banks and thrifts will bear the worst of the new anti-preemption changes, state chartered banks also stand to lose some of the preemption efficiencies they have enjoyed. Many preemption rules apply without regard to charter type and, even where preemption is specific to federally chartered banks, most states have some variety of “wildcard” statute offering state banks parity with their federal counterparts.
It was shortsighted to have concluded that preemption is always contrary to consumer interests and that rolling back preemption and hamstringing it in the future ensures better public policy. Let us recall some examples from a prior financial crisis— the extraordinarily high interest rate environment of the late 1970s and early 1980s when the prime rate of interest, at its peak, skyrocketed to 21 percent.
Many state usury limits were set at well below market rates of interest. Credit, particularly housing credit, was unavailable to consumers as banks were forbidden from charging rates at prevailing market levels. The solution was federal preemption of mortgage loan interest rates.
In that extreme rate environment, banks and consumers alike often preferred adjustable rate mortgages. ARMs would have reduced the bank’s risk of rate volatility, and consumers with immediate housing credit needs could have avoided locking in historically high rates for the long term. Unfortunately, this was not possible in a number of states that mandated that loans have level payments that could not vary over the life of the loan. The solution was federal preemption of these state rules.
Also during this era, consumers did not always get the rates and other mortgage loan terms they deserved based on their credit history. Various states prohibited “due-on-sale clauses,” the contractual provisions permitting a bank to deem the entire note due and payable upon sale of the property. Under these laws, mortgage loans became “assumable” by any purchaser of the property, including one less creditworthy than the initial borrower. Hence, the initial borrower was forced to pay a risk premium even if he or she had no intentions of selling. The solution, again, was federal preemption of state prohibitions on due-on-sale clauses.
These examples demonstrate that states are not always the best source of enlightened retail banking public policy (or always nimble in making adjustments in a crisis). These examples also show that preemption can be pro-consumer and an important tool in meeting an economic crisis.
Unfortunately, these policy lessons of the past seem to have been lost. Retail bankers now face a double-barreled assault focused on consumer protection from the CFPB and the states. Either one of these “solutions” to perceived regulatory failures of the past would have prompted bankers substantially to tighten their internal consumer compliance controls. Facing both “solutions” simultaneously means that compliance must be a high priority at every level of the bank, starting at the board of directors.