“It’s not what you pay a man, but what he costs you that counts.”
This is, or course, no small matter. Based on data we collect from clients, more than 80% of deposit account fee income now comes from overdraft fees and debit fees. Less than 20% comes from monthly service charges.
Perhaps a touch of history is in order here. For many, many years, monthly service charges were the non-negotiable source of fee income on checking accounts, and the major contributor to profitability. Maybe the fee could be avoided with a whopping average collected balance, but most customers coughed up the fee. Life was good, revenue was predictable, and skies were blue.Then came the “free checking” land rush. If you think about it, this was essentially a large-scale trade of monthly service charge fees for transaction-based fees like O/D and debit. There is no doubt that trade has been positive to this point. But now, with that revenue in some degree of peril, there is an understandable discussion beginning about the need to re-visit monthly service charges and other account-based fees again.
But, before we go too far down that road, let’s ask ourselves something. Rather than re-thinking flat monthly service charges, is it time to think about analyzed retail checking accounts?
Account analysis for business checking has been around since Trigger was a frisky colt, and it’s a pretty simple concept (apologies to everyone in Deposit Ops who actually have to make it work after the friggin’ consultant says it’s simple). Add up the cost of serving the customer for a month – check processing, cash processing, ACH/EFT/ATM services, etc. Calculate fees paid. Give an earnings credit for what has been deposited. If credits cover costs, the account is free for the month. If not, a fee is charged. Financial institutions with business accounts have had this for years.
Actually, many of the retail rewards checking and high yield programs offered now are based on the same concept. The higher interest rate is paid based on the customer performing some number of total or signature debit transactions that clearly make the account profitable. The difference is that these programs are usually more “broad stroke” in their application, i.e. generally customers make the transaction threshold or they don’t. Even so, this is a quasi form of account analysis in place today.
So, if NSF fees are in question and many bankers are going to re-evaluate pricing anyway, why not consider putting retail account on analysis? There are several potential advantages to such a strategy:
Needless to say, there are some challenges to overcome (this is consultantese for “there may be some reasons you’ll think this idea is stupid”):
There may be some variants of this idea to consider. One is some partial application along the 80/20 rule (80% of profits come from 20% of customers). Maybe the 20% that are clearly profitable are left alone and the 80% are put on some kind of analysis. Maybe it is done with the bottom 25%.
Or, maybe key retail accounts are put on analysis first to get a better idea of account-level profitability. For example, heavy users of branches/tellers could be put on analysis to better see their true costs. The same for people who still write checks instead of using debit. Hey, we all don’t write many checks anymore but 20 billion or so checks are still being written, so somebody is doing something with ’em.
If nothing else, assuming that costs are not prohibitive, there may be very good reasons to put retail accounts on analysis just to start building a good body of information about who’s making the institution money or not.
There is going to be some kind of return to account level fees over the next few years. Management teams and boards are all asking how they can partially offset reduced debit fees after opt-in is required. This conversation will only get tougher if interchange revenue is the next thing to get in the regulatory crosshairs or if even tougher overdraft rules are enacted.
Full-blown retail account analysis may not be the perfect full-blown answer. But it certainly has a place in the debate.