Tech-Powered Consumers Are Denying Banks Desperately Needed Fees

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Customers are a little richer and a little more tech savvy these days, and it's costing banks money.

Several banks this earnings season have reported lower service charges on deposit accounts, including TCF Financial and Regions Financial on Tuesday. It is an important trend to watch because banks are relying heavily on overdraft, ATM and other fee income as margins remain thin and cost-cutting options dwindle.

Perhaps most intriguing is where bank executives are placing the blame: on consumers who are dodging fees by hanging onto their extra cash and using apps to more frequently check their balances.

"There is a secular trend of people having better information," which helps customers "better manage their money, and not have accidents as often," said William Cooper, TCF's chairman and chief executive, using a euphemism for overdrafts in a conference call with analysts.

Additionally, customers are simply spending less than anticipated, apparently holding on to the money they have saved at the pump while gasoline prices have fallen, he said."[L]ower oil prices have gone into deposits, not spending," Cooper said. "On average, the customer has a little bit more money in their account, and they haven't cranked up the spending as was anticipated."

Some banks say they are willing to accept the compromise of lower services charges on deposit accounts in the short run in exchange in the long run (they hope) for higher revenue growth as consumers strengthen their financial footing and buy additional banking products.

However, it wouldn't be a compromise if everyone was happy with the deal. The deposit service charge trade-off, in particular, does not always sit well with analysts and investors.

Consider what happened on Tuesday when the $20 billion-asset TCF reported first-quarter results. Noninterest income at the Wayzata, Minn., company fell 3% to $101 million, from a year earlier. Its "fees and service charges, "sometimes called "service charges on deposit accounts" at other banks, fell 7% to $34 million.

Besides some of the changes in consumer behavior mentioned by Cooper, Vice Chairman Tom Jasper said the company has historically reported lower fees in the first quarter.

Ken Zerbe, an analyst at Morgan Stanley, said the trend was more than seasonal.

TCF's "ongoing decline in [deposit service charges] over the last several years has been quite severe," Zerbe wrote in a Tuesday research note. The behavioral changes at TCF are "unlikely to change any time soon."

TCF is not alone this quarter. Also on Tuesday, the $122 billion-asset Regions in Birmingham, Ala., said deposit service charges fell 7% to $161 million. At $14 billion-asset MB Financial in Chicago, charges were up slightly from a year ago, but they have declined for two-straight quarters, to $3.1 million in the first quarter.

On Monday, the $14 billion-asset BancorpSouth in Tupelo, Miss., said deposit service charges fell 10% to $11.3 million.

The drop-off is viewed as a good thing at some institutions, Erik Oja, an analyst at S&P Capital IQ, said in an interview. JPMorgan Chase is among the banks that have purposely driven off deposits from unwanted customers, in an attempt to lure more-desirable deposits, Oja said.

"I do know that banks are trying to return those deposits that don't fit into their business model," Oja said. "In previous quarters, the attitude was, 'we'll just take it.' Now I'm seeing a lot of banks deliberately steer into the deposits they want."

Bank of America has also reported declines in deposit service charges as customers take advantage of the bank's rewards programs and maintain higher balances, which reduces fees, Chief Financial Officer Bruce Thompson said during an Apr. 15 conference call.

"As we continue to drive the core checking account for households, we are seeing... less fees," Brian Moynihan, chairman and chief executive, said during the conference call.

"The business has shifted... based on our priority of making sure that we just don't have a lot of checking accounts, we have a lot of core checking accounts," Moynihan said.

Fifth Third Bancorp in Cincinnati has also accepted the trade-off. Its service charges on deposit accounts were little changed from a year earlier, rising 1.5% to $135 million. But CEO Kevin Kabat acknowledges that the figure may decline further as consumers learn how to avoid fees through increased mobile-banking use.

"Clearly, mobile banking gives folks much more access and much more awareness and much more real-time ability to manage your account," all of which leads to the assessment of fewer deposit-account fees, Kabat said in an interview.

The hope is that consumers will add more products with Fifth Third, he said.

"From our standpoint, we've always valued the deeper relationship," Kabat said.

There is another advantage to making less money on service charges, TCF's Cooper said . Fewer overdraft charges are often associated with lower consumer attrition rates. And higher deposit balances helps the bank increase its margins.

"So it isn't all bad news," Cooper said.

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