A ruling by the Federal Deposit Insurance Corp. earlier this year caused many institutions to begin changing their business banking fee structures and associated documentation.
This ruling, handed down in July, discouraged financial institutions from designating that customer fees are for "FDIC Insurance" or from stating, or even implying, the FDIC is charging such a fee. The FDIC stated that while banks are not prohibited from passing such costs along to customers, FDIC-related terminology should not be used.
Given that the FDIC did not provide a definitive deadline or any directive relating to how or when financial institutions should comply with the new ruling, many institutions are left wondering what the new norm will be for the industry.
Before the FDIC's directive, the majority of financial institutions used the term "FDIC" in their description of the fee. However, because these institutions range from small community banks to large commercial institutions, the approach each institution will take to conform to the new ruling could be very different.
In August, Informa Research Services conducted a survey with commercial services and business banking professionals from more than 70 unique institutions (asset sizes ranging from less than $1 billion to more than $1 trillion) inquiring how each was handling the changes resulting from this FDIC ruling.
The result shows a large majority of institutions are opting for a simple solution: adjust the description of the fee to meet the new FDIC guidelines. In effect, the new question has become, what term will institutions use to describe this fee going forward? Based on survey responses, "deposit" has shown to be one of the more popular terms being used in new naming conventions (e.g., deposit fee and deposit coverage).
Many institutions indicated they would rather not change the name of their FDIC fee, but, in light of the FDIC ruling, decided to acquiesce. Many institutions mentioned they were apprehensive about the change, as it would only cause more questions from their customers.
Most institutions indicated they plan to make adjustments to their FDIC fee description before 2012 comes to an end. Some implied they will wait to see what other financial institutions do before acting or will wait until their next regularly scheduled annual pricing event to make the change.
A small percentage of institutions intend to keep the terms "FDIC" or "insurance" in the name, suggesting that they do not feel a change is necessary. As one institution surveyed put it "we don't feel the need to change a consistent practice we have been doing for more than 10 years."
Many institutions are still lingering in the contemplation stage and are undecided when it comes to what new, acceptable terminology they will use. Amid concerns of unlimited FDIC coverage likely coming to an end in 2012, it is understandable that many institutions would like to resolve this matter before they must tackle the looming Transaction Account Guarantee Program issue.
Beyond adjusting the fee name, only a small minority of institutions indicated they are considering eliminating their FDIC fee entirely. Most of these institutions indicated they would use other means to recoup the cost of their FDIC expense (e.g., adjust earnings credit rates, increase monthly maintenance fees, bundle with existing fees).
In October, the first major financial institution, KeyBank, eliminated its FDIC fee, lowered its earnings credit rates and increased its monthly maintenance fee as a byproduct of this new FDIC ruling. It eliminated its FDIC fee as a way to minimize any negative effects that would have come from the FDIC ruling and the possible elimination of the unlimited FDIC coverage. A number of other smaller institutions have also eliminated their FDIC fee.
FDIC fees have always been a hot topic in the financial industry and will continue to be well into 2013. Institutions will continue to make FDIC changes based on the new ruling. While Informa analysts predict possible rate increases in 2013, along with unlimited FDIC coverage possibly coming to an end, the FDIC fee will still be an important issue that cannot be ignored. Informa's experts highly recommend that institutions keep a close eye on their competitive landscape related to FDIC changes made by financial institutions.
Randy Rosen, certified treasury Professional, is director of commercial earnings credit allowance and deposit research at Informa Research Services Inc., a market research company specializing in the financial industry. He has researched financial institutions since 1996 and worked in the financial industry since 1991.