BANKTHINK

Bank Customers Should Get What They Pay For

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Years ago, the airline industry provided passengers with niceties including hot meals, snacks and beverages at no additional charge. Now customers can hardly turn around without encountering a new fee for checked bags, seats with extra leg-room or early boarding privileges. Getting a bag of peanuts on some flights is impossible, and some airlines now charge fees even for carry-on bags. All these tagged-on expenses are part of the airlines' attempt to compensate for the rising cost of fuel prices while still offering relatively low fares.

Annoying as these practices may be, the banking industry has something to learn from fee-hungry airlines. Banking services have become more expensive over the last decade while fee income has eroded. Meanwhile, banks have enhanced the quality and range of services they provide to customers without charging enough fees to cover the cost. I am not advocating that banks follow the airlines' lead and start charging for every individual service they provide la carte, but banks do need to re-think what they are and are not giving away for free.

Whereas checking account customers in the late 1980s and early 1990s might receive a checking account, a monthly statement, and a debit card, financial institutions now offer in-demand features like online banking, bill pay, free ATM transactions, mobile banking and remote check deposit applications. The banking industry prides itself on providing customers the best products and services money can buy. The problem is that no one "buys" them.

If a consumer wants all of these expensive services, they should have to pay for them. Free checking should be provided only to customers who sign up for the most basic accounts and are willing to give up certain frills in order to avoid fees. Customers who want checking accounts that come with a full range of services like bill pay, mobile banking and remote deposit capture should understand that they'll have to either pay a fee or maintain a balance relationship sufficient to warrant waiving that fee. In today's environment, that demand deposit account balance would have to be in excess of $20,000 for banks to break even. For competitive reasons, an average balance threshold in the $5,000-$10,000 range may suffice.

Of course, banks have trained their customers to expect to receive a range of services for free. Can they suddenly start charging a paper statement fee to all customers who decline to sign up for e-statements? Asking people to pay extra for the same things they previously received gratis is not the way to go. Just look at the backlash against airlines over baggage fees. Instead, banks should add value to customers' checking accounts, offering to provide them with services they want and need for a price. Examples of these added-value services might include identity theft protection, credit score monitoring with alerts and cell phone insurance.

Bundling these services together for a monthly fee and attaching them to all but the most basic, no-frills checking accounts, rather than selling them individually, will help banks effectively implement monthly maintenance fees across more than 80% of their account base. This will significantly increase fee income immediately, whereas trying to sell these enhancement services separately would generate only a few dollars of revenue per sale. If banks also offer to waive the monthly fee for accounts with value-added products when customers keep a minimum balance above a given amount, they can motivate customers to bring in additional deposits.

If banks implement additional service fees with the right products, a careful strategy, and thorough employee training, the end result will be much happier customers and a big boost to fee income.

Mike Sobba is president of Strunk LLC, a consulting firm for community banks and credit unions.

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Comments (5)
It seems a stretch to think that consumers who have been conditioned to receiving free banking services will be keen to pay fees in return for bundled identity theft protection or cell phone insurance. Do they value those services so highly that they would view the bundle favorably? Or, will they seek banks offering "basic" accounts with no fee? There are only a handfull of airlines and routes, but 14 thousand banks and credit unions to choose from.
Posted by MrPotter | Monday, May 05 2014 at 2:52PM ET
Totally agree with the argument that banks have painted themselves into a corner with "free" stuff. I have my doubts about whether aggressively selling new add-on products (that sound nice...but not essential) will solve that. I'm not as convinced as some that beginning to charge for things we should charge for will be as catastrophic as some predict. And besides... if some of the more desired (and costly to the bank) "free" services being provided make certain customer relationships unprofitable... well, wouldn't those customers leaving be a financial plus? How hard should we fight to keep unprofitable relationships?
Posted by My 2 Cents | Monday, May 05 2014 at 4:53PM ET
If they start charging me a bunch of fees perhaps they should pay some interest on deposit accounts. If my banks start charging fees I'll probably switch to an internet bank that doesn't gouge me.
Posted by Jcor Banking | Tuesday, May 06 2014 at 7:21AM ET
Do you have any idea how arrogant that sounds: "Bank customers should get what they pay for"? (i.e. nothing) What a customer-unfriendly attitude. Maybe Mr. Sobba has spent too much time in the consultant world and not enough time trying to win customer loyalty.

Not only that, every one of the "in demand" features he itemizes - "online banking, bill pay, free ATM transactions, mobile banking and remote check deposit applications" actually SAVES the bank money by replacing expensive teller and/or paper transactions with automated electronic ones. Come on.
Posted by Wofat | Tuesday, May 06 2014 at 10:11AM ET
A part of the challenge is that our direct competitors can continue to offer lower loan rates, no loan fees and other free service because of no federal or state income taxes. In our market is 1.49% auto loan regardless of age of vehicle, 750+ score and mortgage rates as low as 2.99%.

It is challenging....
Posted by donsaint | Tuesday, May 06 2014 at 1:09PM ET
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