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 FAIR LENDING OR FAIR BANKING?

DEVELOPING THE NEW CHECKING ACCOUNT PRODUCT LINE

Most everyone is working on their checking account product suite and other product line changes.  Banks have either introduced the new line, are contemplating doing so or are fixing to contemplate doing so.  Below are some thoughts regarding the process.

1.     Make it simple.  Our product lines are typically too convoluted, complex and undifferentiated.  We have an opportunity to wipe out inappropriately grandfathered accounts or those whose time has come and gone.  Have heart – clarity and simplicity work for both customers and associates.

2.    Expect employee resistance.  It will far exceed customer resistance.  Employees tell us that customers will balk at most changes we contemplate, but they often reflect their own fears and biases.  I find that internal resistance is far greater than the marketplace position.  Conviction and intestinal fortitude, coupled with effective internal selling to your associates, is key to success.

3.    Ensure the products are profitable “as is”.  All too often we rely on anticipated customer behavior or additional sales to make the core product profitable.  It is more effective to have a built in minimum level of profit in the product as it is introduced.  Think of the Happy Meals, one of my favorite inventions in the world.  McDonalds might be losing money on the hamburger, but the entire package is guaranteed to be profitable.  Similarly, AMEX might lose money on its concierge service that comes with the platinum and black cards, yet the cards as a whole (each card on its own) are ensured to be profitable due to their pricing.  It isn’t easy to design products that are both marketable and profitable, but it is wise.

4.    Add features and functionality that create value for the customers, not just for the bank. In this new age of customer advocacy, even our own employees aren’t always convinced our products truly serve customer needs.  It behooves all of us to ensure that our products do create value for our customers and are appropriately priced for the value created.  It’s good business even if it might seem less profitable in the short run.  In other words, don’t tweak the proverbial overdraft matrix once more to eke the next dollar of profit.  Instead build products that create value and charge for them.  I know we believe we give everything for free and therefore the marketplace will not pay for services rendered.  I’m not sure this is true.

5.    Charge for value created and for services that could be self-served.  One fair way to price our products is to charge for what is otherwise available on self-service.  The airlines have done a masterful job of doing that, and other industries followed.  We should find creative and appropriate ways to learn from other retailers and charge for balancing your favorite customer’s checkbook…

6.    Recognize the seniors mirror high depositors, and therefore create value for the shareholders.  Some bankers I know consider their senior customers to be rate sensitive surfers, moving their money from one higher-paying CD shop to another.  Yet the analyses I see show that, while rate sensitive, those folks have meaningful balances in interest-free accounts, and they do aggregate relationships.  I know today’s free money doesn’t mean much to the bottom line, but it means a lot to the company’s franchise value.  So analyze your seniors and see whether it is profitable to revive those day bus tours and other senior perks.  They are worth the money and headaches they cause.

7.    Consider tenure-related pricing.  Banks have been striving to find effective loyalty programs for years, but generally have ended up with the usual merchandise rewards plans.  Why not reward customers for staying with us?  If each customer represents an annuity, the longer they stay the greater their net present value, and the less stressful it is to make the earnings “nut” every year.  So why not tell our customers that we will show them our appreciation for staying with us by discounts, rate spiffs and rewards for every year they bank with us? This approach might be especially impactful early on in the relationship, and is less meaningful as customers anchor themselves to us after, say, 5-7 years.

8.    Consider innovative pricing techniques.  For example, what if you charged $8 a month for your checking account, but the customer could shave off $3 if they opted for e-statements, or $5 if they had 15 debit card transactions, or wipe $1 for every $100 average balance in the customer account? Or credit $1 of fee for every year of customer tenure up to full fee waiver? Why not put the customer in the driver’s seat and give them the opportunity to create their own “fee-free” account?  Alternatively, offer your account with e-statement only, and charge for paper statements.

9.    Whatever changes you make, be gentle.  Allow customers 90 days for conversion, or even grandfather for a year your MVP clients.  Just make sure these are your most valuable and not most vocal customers…

10. Make strategic decisions regarding your customer segments.  If you’re interested in low-balance, high transaction customers design a product that will appeal to them.  There is meaningful dislocation in the market for those customers, as most mega-banks and other banks as well require high minimum balances from those clients.

11. Revisit incentives.  Volume does not equal value.  If you really want  relationships, put your money where your mouth is and pay for share of wallet, services per household and cross-selling to new households.

12. Tell employees the impact of new products and fees.  Employees need to understand why the product line has been redesigned and see the fairness in your approach.  Explain why we do what we do, how profitable these will be for the bank and why it’s an equitable solution.  Being on the moral high-ground is essential to effective selling and customer satisfaction.

13. Sell your products to the employees first.  It is very difficult to sell products you haven’t experienced.  Story-selling is both easy and honest, but cannot happen without first-hand experience.  Market your own employees first, give them incentives to use your new products and then expect them to sell those to appropriate customers.

Anecdotal evidence shows that banks that have revised their checking product line and simplified it found that they open far less accounts (8% less on average) but total balances were meaningfully higher.  In addition, average debit card transactions per account rose 20%+ for these new customers, as did ACH credits and overdraft protection fees.

In summary, finding product solutions that work for both customers and shareholders is the key to success.  We are not in a zero-sum game with our customers.  We can and should find ways to create value for them while charging a fair price for our services.  In this case, I firmly believe that, if we build it, they will come.

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