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BirdsEye View free checkingSCB Forums members
discussed the departure of Free Checking from the
banking scene last March at our retail and Marketing meetings. The attack
of NSF/OD fees has become so fierce that these fees were unlikely to survive
regulatory scrutiny. Ten years ago, when
some banks (and consultants) began "pushing" free checking, the hue
and cry was as loud as can be. Banks were deeply concerned about losing
the meaningful income of monthly fees associated with their checking accounts.
Well, here we are, ten years later, having the same concerns about NSF/OD
fees These fees, that appeared to be the gift that keeps on giving,
became the prime fee income driver of well over 60% of our industry in this
past decade. Ever since the introduction of these fees, coupled with the
clever "overdraft protection", banks and their vendors have been busy
finding ways to "optimize the matrix", i.e. make more money off these
fees. Elements such as check presentment order, inclusion of electronic
items and their presentment order, and other creative fees, were introduced
over the decade. The Fed said it focused on ATM and debit card
transactions because they have been "a key driver behind the growth in the
volume and cost of overdraft fees" (41% of NSF transactions).
Finally, consumers and regulators both bulked, which is, in part, why
we're in the soup with respect to these fees and, consequently, free checking. Before you send me
the email explaining why "high to low" is the best service for
customers, please know that I understand the validity of the argument.
Similarly, I have had many calls from customers thanking our bank for the
courtesy overdraft which protected their credit standing and saved them
meaningful amounts in merchant late fees. And yet, we overdid it& The New York Times,
a source of much aggravation for me (why do I keep on reading it???), had an
interesting article Saturday January 23rd on the subject. As
usual, the slant of the article was how evil banks taught consumers to become
irresponsible with their money. That didn't bother me too much; it's par
for the course. What got to me was a statistic the article quoted, which,
while may be 100% accurate, is so very misleading. It said, quoting a
consultant: "The average customer paid 12 overdrafts or other
insufficient funds charges in 2009". That's when I felt compelled,
again, to sit at the computer and bang out an article. Free Checking
coupled with overdraft protection is a product that is highly valued by a small
but important segment of customers who prefer to use overdrafts as a way of
life. They know it's uneconomical, as some pay up to $20K in OD fees, yet
they persist, for reasons of their own, in availing themselves of the
service. These customers, some of whom have been counseled by their banks
in better financial management, still opt for the overdraft protection
lifestyle. They are typically less than 2% of our customers, and often
contributed over 85% of the OD fees. These consumers do not find the
product onerous. They find it useful, and they vote with their
insufficient funds notices time and time again. The New York Times did
not mention this segment. I agree that Free
Checking as we know it today will disappear. I believe we'll go back to
the good old days, with monthly checking fees and value packages (the Happy
Meals I like so well). This will have a temporary impact on bank service
charges, which will take time to shift from NSF/OD to monthly fees.
At the same time, Free Checking with strings (e.g.direct deposit) will persist,
and the free checking with lots of strings product (high rate with many
conditions, e.g. 12 debit card transactions per month) will grow.
Alternatively, stripped down free checking (e.g. no teller access) might be a
solution for some. Additional innovation is also to be expected.
Options such as expanded reward programs and debit card reward points are under
consideration as we speak. At the same time, I
also believe that there will be a small but highly profitable pool of customers
who will gladly opt in and will continue using the overdraft protection
feature, thereby continuing the income stream they provide the bank while
living the way they choose to live. Most of us in banking can't see this
happening because we are in the business and we can't believe that anyone can
be so financially cavalier. The fact is, some people are. Others
are reckless enough not to optimize the interest on their deposits by leaving
large balances in their non-interest bearing checking account. It just
makes them feel good, to have that amount on hand. The message in this
article is simple: the industry will find a way to replace this fee
income stream with another, as the Times predicts. At the same time,
irrational financial behavior is a privilege that any citizen can exercise if
they so desire, and some will. Ensuring that your bank has the product
breadth to meet the broad range of customer needs is the first order of
business. The second: giving customers what they want (with full
explanation of the alternatives) without assuming that we always know better
what's best for them. |