A number of banks are removing check writing from checking accounts as they search for the right blend of service, restrictions and requirements to attract deposits.
KeyCorp (KEY) last week unveiled a "Hassle-Free Account" that provides access to branches, online and mobile banking without overdraft and check writing. The "SafeBalance" account at Bank of America (BAC) has a $4.95 monthly fee and the same exclusions as KeyCorp's product.
This is part of an effort to reach new market segments and build stronger ties to customers, industry experts say. Smaller banks could eventually adopt similar accounts but may to be reluctant to do so immediately.
"Free checking is really interesting," says Jeff Platter, vice president of business intelligence at consultant Haberfeld Associates. "Accounts like Key's work out for bigger banks because they have advantages that community banks don't. They have locations and convenience and a perceived technology advantage."
Some banks already have checking accounts that waive monthly fees if a minimum account balance is maintained or the customer opts for direct deposit into the account. Some banks are creating lower-cost accounts that steer customers to services such as online statements or, in the case of B of A and Key, eliminate certain services.
By giving up potential revenue in areas such as overdraft, some banks are hopeful they can develop greater loyalty or attract new clients, industry experts say. Eliminating paper checks can help banks control costs.
"There are a lot of different ways that we can, as an industry, approach the need to provide services to low- and moderate-income customers," says Steve Reider, president of Bancography.
"Some customers really do value the opportunity to have overdraft and use it as a simple low cost source of credit," Reider adds. "That said, a lot of those overdrafts aren't always clear and can create an adverse situation with the consumer."
KeyCorp's account is "an elegant solution that gives access to the payments system but greatly reduces the risk to the bank and the consumer," Reider says.
KeyCorp examined the competitive landscape and held focus groups to see what customers wanted in a bank before developing its new account, says Dennis Devine, co-president of Key Community Bank. He says the $91 billion-asset company in Cleveland found that customers "start with a huge appetite for simple and clear banking with no surprises."
Key designed the account to meet its criteria by taking fees, including overdraft, off the table. Though KeyCorp recognizes it could be giving up potential revenue in the short run, management hopes to develop stronger ties to customers.
"Financially, we win when our clients win," Devine says. "We will grow the number of clients we are working with. This will cause them to trust us because of the control and choice we put in their hands. That will mean deeper and longer relationships."
Banks often hope to recoup revenue from by selling additional products, industry experts say. That "is a really long row to hoe," warns Dan Roderick, chief executive of Strunk, a consulting firm.
While Devine believes Key's account will have widespread appeal, Dan Geller, executive vice president and Market Rates Insight says it will likely appeal the most to younger customers.
Providing access to online and mobile banking while eliminating checks, something younger clients care less about, is likely to attract Millennials, Geller says. Banks are trying to reach this segment and fend off advances from nontraditional players, such as Walmart Stores.
"In one generation, the baby boomers will diminish dramatically and ... Millennials will be the most significant group of customers," Geller says. "If banks lose them, they will lose the entire next generation of customers. The idea is to attract Millennials with free or almost free services and with basic digital transactions with the hope they evolve into more profitable customers."
Younger customers often end up moving and switching to another financial institution before they require services such as auto loans and mortgages, Roderick says.
"The little acorn theory in banking has been unproven," Roderick adds. "It's a tough strategy to pull off versus the strategy of focusing on the relationship that the customer actually has with you."
Bigger banks often take the lead implementing new types of products, Geller says. Community banks will likely be hesitant to offer such accounts, some industry experts says.
Banks with less than $10 billion of assets escaped cuts to interchange revenue from the Durbin Amendment so those institutions have less motivation to drastically alter their checking products.
Also, if community banks begin placing the same requirements or restrictions on checking accounts as bigger banks, customers may decide to bank with a larger institution that has more convenience with expansive branch and ATM networks, Platter says.