Community banks are starting to regain some traction when it comes to bringing in fees from deposit accounts.
The Federal Reserve Board dealt banks a setback in July 2010 with Regulation E, requiring customer permission for enrollment in overdraft programs. It was especially harsh on smaller banks, which have historically struggled with noninterest income.
Smaller banks are slowly rebounding, according to American Banker's analysis of more than 150 banks with assets of $35 billion or less that recently reported quarterly results. Deposit fees at those banks, on average, increased 5% from a year earlier.
Community banks have been able to recoup some of the fees they lost in the aftermath of Reg E, but they have yet to unearth an all-encompassing solution, industry observers say.
"Banks are still in the experimenting stage of trying different products and collecting fees," says Matt Olney, an analyst at Stephens Inc. "I get the sense that there is no one product that will be a huge benefit."
A continuing surge in deposit accounts is another contributing factor, says Tony Plath, a finance professor at the University of North Carolina at Charlotte.
Still, community banks are finding ways to bring in more revenue from a surge in accounts, industry experts say. But small banks are doing this in a different way than many larger competitors.
Several big banks, for instance, require minimum account balances before they will waive monthly maintenance fees. In contrast, several small banks are willing to waive those fees if customers sign up for other products, such as e-statements, or agree to a certain amount of debit card use.
Community banks are also bundling services such as credit monitoring and identity theft detection with checking accounts, for a fee, says Brad Smith, president and chief executive of Abound Resources. This approach has helped small banks avoid much of the backlash that big banks, including Bank of America, endured as they attempted to overhaul their fee structures.
Small banks are "trying to thread the needle" by making deposit accounts profitable without appearing to be "charging you to death," Smith says. Small banks' approach "allows the customers to have some control."
Making checking accounts conditionally free "empowers" clients, Plath says. Customers are more likely to accept new fees if they "feel like they have the choice … rather than it being forced on them," he says.
Linking free checking to debit card use can boost interchange and overdraft income, Smith says. It also plays into a long-standing belief that customers are less apt to leave banks that provide them with a wide range of services, says Paul Schaus, president of CCG Catalyst Consulting Group.
The key to keeping customers from rioting involves keeping the fees small, Schaus says. B of A's attempt in 2011 to charge a $5 debit card fee partly failed because the charge was viewed by customers as outsized and unreasonable.
Citizens National Bank in Henderson, Texas, brought in more fee income by creating a conditionally free consumer account model in 2011, says Brad Tidwell, the bank's president and chief executive. The $936 million-asset bank will lower or eliminate its fees if customers sign up for e-statements, use a debit card or maintain a minimum balance.
Clear communication is critical to winning over depositors. Citizens National, a unit of Henderson Citizens Bancshares, spent months making phone calls and sending mailers to contact customers. Tidwell, who admits he had "some sleepless nights" worrying about the transition, says that "communication blitz" is the reason there was minimal push back from customers.
"Historically, bankers have done a poor job showing customers the value of" services provided, Tidwell says. "We do provide a value. Do you know of any other business that gives that away for free? We need to do a better job of justifying our value, but you can't be greedy about it."
Citizens National has also benefited from focusing on generating more revenue from commercial deposit, an area that Smith says has potential. More community banks are offering commercial clients an integrated receivables service and remote deposit capture, says Gary Cawthorne, president and chief executive of Wausau Financial Systems. Integrated receivables allow for a single hub to process payments in multiple forms, which are then used for analytics. It can boost revenue tied to Treasury services, another fee-producing area for banks, he says.
Community banks are generating income from commercial clients by charging fees for remote deposit capture services. Small banks are gaining traction by removing barriers to the service by, among other things, providing free scanners in exchange for a larger commitment from a client.
"The conversation is not about raising prices but about offering new capabilities," Cawthorne says. "It is a highly competitive world. Banks need to offer new services that provide value-added" products.
Community National Bank in Great Neck, N.Y., overhauled its fee model after spending more than a month reviewing its service charges and realizing that it was "probably leaving a bit on the table," says Stuart Lubow, the company's chairman and chief executive. To make sure it would stay competitive with larger banks, the $666 million-asset company raised fees but kept them a hair below those of other banks.
Fourth-quarter service charges at Community National rose almost 63% from a year earlier, to roughly $189,000. The company, which mostly serves businesses, prides itself on customer service and flexibility, Lubow says. If a business overdraws an account, someone will call the client to find out what it would like the bank to do.
After implementing the new fees, Lubow was willing to explain the changes to any client with a question, though he says there were few complaints. In some cases the company adjusted its fees if a client had a good reason, such as not being close enough to a branch, for why they shouldn't pay one, Lubow says.
"I don't believe in being afraid to charge customers for good service," Lubow says. "We don't sell our bank on rates. We sell it on service, and with great service there is some cost."