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Can Banks 'Sell' New Fees to the Customers?

US Banker  |  January, 2011

As more banks prepare to charge for basic products, a carrot-and-stick strategy with customers may work better than a more punitive approach.

Bank of America Corp. is adopting the former in testing new checking accounts that in most cases allow a customer to sidestep a monthly maintenance charge only by doing more business with the bank.

It remains to be seen whether such "relationship pricing" can help banks soften the sting many consumers may feel as a result of having to pay for a product they have come to expect for free.

But experts said the strategy has a better chance of acceptance by consumers than would simply slapping on fees with no way to get around them, a tack that other banks are considering.

"It's the implicit recognition that the mind-set that has prevailed until now is finally gone, which is … that a checking account is kind of like the entry-level gateway to a broader financial services relationship," said Ron Shevlin, a senior analyst at the Aite Group LLC research firm in Boston. "That has failed miserably."

The debate over checking account and other fees has grown as new regulations, including overdraft limitations and pending caps on debit card fees, have taken effect. Banks are looking for ways to make up for lost revenue and testing the waters with everything from annual fees on credit cards to charging for paper statements.

Bank of America on Thursday announced four checking account products it will begin testing in Arizona, Georgia and Massachusetts at the end of the month and eventually roll out nationwide. Each type charges a monthly fee, ranging from $6 to $25, though three of the four give customers ways to avoid the fee by depositing a certain amount, maintaining a set balance, using a credit card or satisfying another criterion.

"What we're wanting to do is establish relationships with our customers based on their needs," Susan Faulkner, the deposit and card products executive at the Charlotte, N.C., banking company, said in a conference call with reporters on Thursday. "What we're trying to do with these solutions is give you different benefits … based on your full relationship that you bring to the bank."

For example, a customer using Bank of America's new "Enhanced" checking account can get a $15 monthly fee waived for depositing $2,000 or more into any linked account, maintaining a combined minimum daily balance of $5,000 in linked accounts or using a linked Bank of America credit card for at least one transaction per month.

Though overhauling an entire account lineup is rare, the idea of rewarding customers for using more services is not new.

Several banking companies, such as JPMorgan Chase & Co. and Citigroup Inc., give credit-card holders the ability to earn more rewards points for using more products. Some also offer better rates on lending products for using more services.

"There will be a tiered fee structure in most of these fees," said Robert Hammer, the chief executive of the credit card consulting firm R.K. Hammer in Thousand Oaks, Calif. "If you have more balances, you may pay less. That's been banking since … 1950."

But many banks have resisted adopting a pricing menu based on the use of multiple products because of internal fights over sharing revenues and expenses, Shevlin said.

"For years banks have talked about this notion of relationship-based pricing," Shevlin said. "That has really been tough to do for most banks because of the of the organizational structure. Most products have their own P&L."

"Bank of America has pretty much sucked that up and said, 'We have to rationalize this,' " he added.

Even if customers are angered by the fees, some may not switch banks if they are using multiple products, Shevlin said. "It is really painful to move all of that," he said. Younger consumers who may be "less ensconced" with their banking relationship may be more likely to switch.

Regulatory pressures are a strong motivator of pricing changes.

Last month the Federal Reserve Board proposed capping the fees that debit-card-issuing banks collect from merchants at a maximum of 12 cents per transaction, compared with the current average of 44 cents.

This rule, if adopted, could reduce debit interchange revenue by $13 billion annually, according to CardHub.com, a lead generation site for cards.

"It's a fact that there's a new economic reality and there are new regulations and legislation," Faulkner said. "Of course that new economic reality is sitting in front of us," she said.

JPMorgan Chase cited the debit interchange regulation as its primary reason for adding checking account fees this year.

Starting Feb. 8, customers using its Chase Checking account, which will no longer be offered to new customers, must do a minimum direct deposit of $500 or make at least five debit card transactions in a single month to avoid a $6 fee. Previously, customers could do a direct deposit of any amount or make five debit card transactions to avoid the fee.

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