REQUIEM TO FREE CHECKING

 

While our system is awash with deposits, core deposits remain the primary driver for franchise value and bank stock valuation.  US FDIC-insured institutions have grown deposits to almost $7.56 TRILLION this year, up nearly 7.2% from 2008, according to SNL Financial.  The report is based on data from more then 99,000 branches at the end of June (did you know we had THAT many?).  This might lull us into a false sense of security when it comes to deposits, but it shouldn't.  Consider these facts:

 

Banks with assets between $50-$250B experienced the sharpest jump in deposits (18.2%!!!).  Deposits at banks with assets below $5B rose 12.3%, and regional banks ($5-$50B) grew only 4.8%.  National banks experienced a decline of 1.9%, possibly thanks to the FDIC's increase in insured deposit limits to $250,000 from $100,000.

 

Notwithstanding, the ten largest banks have 55% of total US deposits, with BofA at 12%, Wells at 10% and Chase at 8.5%.

 

What does this mean to us community banks?  It means that the opportunity is greater than ever, given the perceived instability of largest banks.  It also means that the super-regionals are taking more than their fair share of market share.  And it means that if your deposits grew lea than 12.3% and you're under $5B, you are not performing at market levels.

 

This, combined with the attack on free checking fees, presents an interesting dilemma to my readers: how to capture more deposits without losing money on every account which, in the past, has typically yielded over $150 a year in fees?

 

While the rumors of the death of Free Checking are premature, yet we need to recognize that, in most markets, "That dog won't hunt", as they say in Texas.  Pockets of opportunity still exist, and some banks will make much hay filling those local markets' needs.  At the same, the low balance/high NSF model is under terminal threat by the legislature, and is likely to disappear as we know it today.

 

Bankers are now asking:  What can we do to replace the income streams from NSF/OD we currently receive?  This is no small change; NSF/OD income accounts for over 30% of banks' fee income on average, and a higher number for intensely retail banks.  We've had years of offering a checking account where the main income source is fees, mostly due to overdraft (thanks to those consultants who "optimized our courtesy overdraft matrix time and time again).  Now that this model is under serious attack, the question I hear in our Forums is:  What's next?

 

This reminds me of the movie "Back to the Future".  Ten years ago CEOs agonized over the decision to stop charging monthly fees on their checking accounts.  Those constituted an important income stream for the bank, and giving them up was expected to be a huge blow to fee income.  Somehow, we found a way to replace monthly fees with activity fees.  And now, the tables have turned again, and we're in the same predicament.  Is the answer going back to monthly fee checking?

 

One element to consider is reviewing which banks never joined the free checking bandwagon.  Eleven of the top 60 banks do not offer totally free checking, including quintessential retail banks such as Bank of America, Chase, Citibank and Wells Fargo.  They offer simple ways to get the fees waived - direct deposit, debit card activity, auto-debit or ACH, etc.  These banks enjoy ubiquitous distribution and best-in-class online banking, which give them meaningful muscle in their markets.  They have a value proposition based on distribution effectiveness, perception of safety (too big to fail) and convenience.

 

Interestingly, this value proposition matches well against current bank customers, especially business clients, who value convenient online banking/remote access and convenient business hours.

 

The picture is quite different when prospective customers consider bank selection.  Then competitive business fees, service (promptly following up on requests), good value checking and convenience locations are more important than other criteria for bank selection.  Customers, especially small businesses, value far more today than even 5 years ago ATM convenience, online banking, online bill pay, surcharge-free ATMs and call center extended hours.

 

Armed with this data, you have several alternatives:

 

1. Offer "almost" free checking, or free checking with one string (direct deposit, bill pay, X number of signature debit card transactions per month etc.)
2. Offer high-yield checking with many strings attached
3. Offer Happy Meals (product packages) with the free checking as the main course that "comes with" a set of profitable products
4. Offer monthly-fee checking accounts with clear transition paths from free checking

 

We have been discussing these alternatives at our Forums.  The right solutions for you depend on your bank, its target markets and its execution ability.  Conceptually, though, you have the following elements to assemble your product line with:

 

·                    Checking account with human contact

·                    Checking account without human contact

·                    Controlled NFS/OD fees

·                    Best fee income generator in signature debit card transactions

·                    Retention enhancement means longer, more reliable income streams

 

Things not to do include:

 

·                    Finding another way to rack up the fees (such as "tweaking the matrix" we have done in the past)

·                    Bait and switch (such as offering high yield checking with many strings attached mostly to people who are unlikely to fulfill the conditions to get the yield

·                    Not enforcing suitability across the board

 

The reason for not optimizing the new product line fees is to avoid another smack-down by the regulators.  We learn time and time again that as we find another way to gain a penny per share on the back of the customer, we inevitably reach the penny that breaks the camel's back&

 

Another important consideration, brought up by my good friend Brian Edwards, SVP at Astoria Federal, is the impact of free checking on banks' sales approaches.  Brian says:  "The era of free checking spawned sales cultures that focused entirely on widgets that were fee income driven. Not only have we witnessed the quality of new account generation deteriorate, but the free checking gorilla has caused some to lose sight of the importance of true, primary account generation that produces low cost deposits, cross-sell growth and ultimately drives franchise value." Perfectly put, Brian!

 

The key going forward is to build profitable and lasting relationships with our checking account customers.  Deposits are abound; we just need to make sure they last!