From Free to Fee

Bankers across the country are reshaping their checking account product lines as I write this article.  Most are shifting to a simpler product offering for both retail and commercial customers, more often than not comprised of checking accounts with monthly fees.  One major question lingers:  should we get rid of the free checking account?

There is much trepidation around this query.  The free checking account, both commercial and retail, served as the primary growth engine of core deposits for many banks.  An entire consulting industry emerged helping banks figure out how to attract more free checking customers with frequent mailing and a wide array of gifts, and a separate cadre of consultants worked with many on “optimizing the matrix” to ensure these customers are profitable through debit cards and NSF fees.

Durbin and Dodd-Frank put an end to this approach, and, with it, to the profitability of free checking for most banks.  Hence the new checking account product line.  But what to do with free checking?  Is the product inherently unprofitable?  And how will we grow checking accounts without giving the bank away?

One philosophical consideration before you evaluate the product viability itself is, what kind of sales people do you attract and reward if they can only give the product away instead of focusing on customer needs and matching those with the appropriate product suite?   Offering free checking means to most bankers that this is the product of choice, while, in reality, it does not meet the needs of most customers.  Free CAN be beat, but many a banker has not realized it.

Another philosophical question to be asked is, what type of customer is attracted by this product?  Is that your target market?  It may or may not be, but the question needs to be asked.

Here is one way to evaluate this critical decision.  In my mind, the decision is not whether to keep or toss free checking.  It is about whether the product can be profitable in this new regulatory environment.

Product profitability has several elements to it:  the cost to produce, the fees to be charged, and the ancillary products that can be sold in conjunction with the product to enhance profitability.

The first alternative is to lower the production cost.  Most banks use a third party to “manufacture” the product and deliver it to customers.  The cost of delivery is therefore only partially controlled by the bank, but it does bear some analysis and discussion.  Vendors, even of core systems, can be replaced or renegotiated.  In some ways, banks who own their infrastructure may have an advantage, if they can service customers efficiently.

The second alternative is the fees of the ancillary products and services accompanying the core product: debit card, online banking, “cash reserve” etc.  Some banks actually charge for these services and have been doing so for years.  Those banks have a better opportunity to offer free checking going forward since the product profitability is not supported exclusively by NSFs and debit card swipes, but by fees charged for additional products.

Another opportunity to turn the free checking account from a money loser to a break-even proposition for many customers is to offer the product with eStatements.  Those meaningfully cut the cost of product delivery both at initiation and in subsequent years (through electronic disclosures etc.). Here, the customer only pays if they wish to access the bank through non-self-service means.  They have full availability of information through a self-service channel if they choose it.

Features such as no checks, the use of pre-paid cards and reloadable cards can also facilitate offering free checking with no strings attached since they change the economics of the product delivery and servicing.

Another consideration is the level of activity in the account.  Banks can encourage activity by offering bonuses for desired activity, and similarly discourage lack of usage and “empty” accounts by levying an inactivity fee.  Again, the customer is in the driver’s seat here, and can avoid all fees if they use the product as intended by both the customer and the bank.

My point is simple:  the new checking account product line should be determined by the bank’s ability to make money on the products while serving the full range of customer needs; it should not be determined by an ineffective sales force or by over-zealous finance professionals.  Through effective targeting, efficient operations and clear product design we can continue to grow our checking account base without compromising profitability while offering a fair value proposition to our customers.