LAS VEGAS -
In remarks before BAI's Retail Delivery Conference here, Jeffrey Burton, SVP-with Dallas-based Carreker Corp, a unit of CheckFree, said banks have no choice but to rethink fee income after relying heavily on it for the past two decades. He noted in a presentation titled, " "Fee Income Cooling-An Inconvenient Truth?" (a play on Al Gore's presentation on Global warming), that fees now represent 49% of banks' total income.
Burton told the meeting that deposit service charges (primarily overdraft protection fees) constitute 21% of those fees, and have become so important to banks that many have abandoned monthly maintenance fees in favor of "free checking" offers. But he noted that the monthly percentage of bank customers using a fee-based liquidity product, such as overdraft protection, has slipped to 9.3% in 2007 from an all-time high of about 9.6% in 2005. "Those looking from the outside think (fee income) is growing uncontrollably," he said. "Actually, it peaked two years ago."
Perhaps even more damaging to banks in the long run, Burton added, is that customers are often borrowing from non-bank competitors such as payday lenders. He attributed this to the fact that many banks still view an overdraft protection fee as a punitive measure, rather than simply as a product-and consumers don't like it.
"Banks forever have seen this as the 'penalty' space," Burton said. "Non-banks see it as a product they're offering. They're not there to judge."
In effort to win back customers, Burton said, banks need to create alternatives more akin to what the non-bank lenders offer-products that offer customers the ability to proactively borrow money for a fixed fee in a clear-cut, predictable way.
As an example, Kent Stone, EVP and chief strategist of consumer banking for Minneapolis-based U.S. Bancorp described his bank's Checking Account Advance product, which offers customers the ability to get a fee-based, short-term loan. The bank charges a fee of $2 for every $20 borrowed and the loan lasts 35 days. (The fee is collected from a customer's next direct deposit or payment along with the original amount advanced.)
Initially, Checking Account Advance was just offered to bank customers who had direct deposit with U.S. Bank, but it's now being rolled out to a wider audience, Stone said.
