Staring at the potential loss of billions in overdraft fees, some banks are generating income by abandoning the commoditylike nature of checking accounts.
Executives say that accounts offering improved data security and better rewards programs are already bringing in revenue. But they agree that what consumers really want is to customize their accounts — people will pay monthly fees for the privilege of combining different services to develop exactly what they need.
"It was hard to show why my free checking was better than your free checking," said Terry Zink, an executive vice president at Fifth Third Bancorp. "At the end of the day, price becomes an issue in the absence of value. If you provide the value, people will pay the price."
He estimated that at many banks, overdraft fees can generate 75% or more of the revenue on consumer deposit accounts.
Fifth Third, of Cincinnati, has been implementing premium checking for some time now. It began diversifying beyond those overdraft fees nearly two years ago, and its Secure Account Checking package is now one of its most popular products, accounting for roughly 20% of new accounts opened, Zink said. The account costs $7.50 a month, and its main draw is identity-theft monitoring.
For customers who shop online, the secure account provides a service that they otherwise would pay perhaps $10 to $20 for — and to another provider, Zink said. "I would want identity-theft protection even if I didn't get it through my checking account."
Since then, Fifth Third has introduced other checking accounts with premium services. For example, its Gold Checking package, which costs $15 per month, includes a range of additional services such as cashier's checks, money orders and waivers on out-of-network automated teller machine withdrawals.
Populist anger toward banks last year prompted regulators to enact a broad range of policies designed to curb what many people perceive as unfair fees, including overdraft fees on checking accounts.
According to a study by Novantas LLC, a New York consulting firm, and Informa Research Services, overdraft fees are worth $18 billion to $23 billion to the industry in annual revenues. And not only are banks looking at a significant loss of revenue, they also have the operational challenges of complying with the new requirements.
Hank Israel, a partner at Novantas, said banks will need to bring more to the table to get consumers to spend money on standard DDA products. "People don't want to pay for existing services," Israel said. "What people are most willing to pay for is identity protection."
BBVA Compass also began to diversify its checking account revenue sources before the financial crisis hit.
Richard J. Claypoole, a senior vice president at BBVA Compass and its director of consumer deposit products, said the key is letting customers design their own accounts.
"What we are trying to do," he said, "is to figure out valuable things to put on the shelf that people will want to buy."
Build to Order, a checking account rolled out two and a half years ago, has become BBVA Compass' top-selling product — representing 80% of new checking accounts — by allowing customers to personalize the features, Claypoole said.
BBVA Compass, a Birmingham, Ala., unit of Banco Bilbao Vizcaya Argentaria SA, began with a free checking account that included online banking and bill payment, then layered on a set of premium features.
Customers can choose two from a list for free, then pay $2 a month for additional features. The menu includes free access to out-of-network ATMs, interest on balances, double reward points, 5-cent cash back on debit card purchases, a $25 anniversary bonus and one overdraft refund a year.
"What we were trying to do was to differentiate ourselves in a very competitive free-checking environment," Claypoole said. "For some people, free ATM use is a must-have. For others it's a nonstarter."
BBVA Compass allows customers to switch features on the fly, adding free ATMs if they are taking a trip outside the company's area, for instance, then switching back to another preferred feature when they return home, Claypoole said. "They control the features of the account as their life changes, or their lifestyle changes."
BBVA Compass launched a small-business version of the account last quarter and is considering customer-personalized features for savings and other bank accounts, Claypoole said. "It's not just a product. It's a philosophy of how you serve your customer."
The company developed the technology in-house to drive the BTO account, Claypoole said. "You haven't seen a lot of copycats, because there are some challenges to developing a platform like this."
Vendors also are offering banks alternatives to overdraft fees.
The financial technology company Fiserv Inc., for instance, announced in November that it would come out with a Relationship Advance line of credit linked to retail customers' checking accounts.
Jeff Burton, a vice president at the Brookfield, Wis., vendor and managing director of its revenue enhancement unit, said it has offered such a service since 2001 through its consulting service and expects to offer it as a standardized product by the end of the second quarter. "The most complicated part of the solution is the loan servicing," he said.
Relationship Advance does require customers to opt in, but because it is a credit product it is regulated under the Federal Reserve's Regulation Z rather than Reg E, which covers electronic payments.
"What this product caters to is more convenience-type lending," Burton said. "It's less punitive than overdrafts or payday lending."
The new policies will also raise operational issues in banks' back offices, said Dan M. Fisher, the president and chief executive of Copper River Group Inc., a Fargo, N.D., consulting and research firm for community bankers.
Banks will need to update their transaction processing systems to help them evaluate specific transactions that might currently trigger overdraft fees, Fisher said. "They have to be able to survey their systems and make sure they can make these additional edits to their systems. This is programming they either have to do for themselves or hire their core vendors to do it."
