Checking accounts have long been the core product for bank customers. Times may be changing. The newest banking regulations are pushing banks toward charging fees for services that used to be free and cutting rewards programs in order to recoup their losses.
As part of the Dodd-Frank law enacted last year, the Federal Reserve proposed capping the amount banks can charge merchants for debit transactions at seven to 12 cents, down from an average rate of 44 cents. This proposal could reduce the revenue banks make from interchange fees by more than half, according to one report.
The big question is whether consumers will be willing to pay more fees or if they will find alternatives to the standard checking account, creating a new era of primary banking accounts.
There are several alternative options to traditional checking accounts such as prepaid debit cards, online only banks (ING as one example) and credit unions. Credit unions in particular have experienced a rise in popularity during the financial crisis as an option consumers believe they can trust.
For many, the convenience of large financial institutions will likely outweigh the additional fees and loss of rewards programs they may incur. For others, banking may become obsolete. J.P. Morgan chief executive James Dimon has predicted that up to 5% of banking customers may be pushed out of the banking system as a result of higher fees.
Because Demand Deposit Accounts (DDA) have always been such a staple of banks and they could compete based on free checking options, interest rates and rewards programs there has not been much pressure to improve the account opening process.
The reality is that new regulations and decreasing profitability of these accounts are going to force banks to consider a new model to keep both shareholders and customers happy. Bankers need better control of their risk exposure and flexibility to respond to regulatory changes quickly.
The good news is banks can lower the costs of their DDA programs, without compromising their risk exposure, by incorporating new data sources into their account opening process. In the past banks typically relied on eFunds data, without even considering other options.
IDAnalytics, LexisNexis, and others, have been proven to provide tangible lift in this market. Because there has never been any competition for data in DDA opening, costs have run high. With more options available, data costs will naturally be driven down. This may help banks avoid passing unnecessary fees on to their customers as a result of the new regulations.
While lower costs bring tremendous value to banks, another benefit is that new data sources bring richness to the decision making process.
Data has unique predictive value based on the sources it is derived from, meaning banks can choose data sources based on how well the data addresses their market needs.
For example, an online bank is going to face different challenges than a regional brick and mortar bank. Alternative data sources can be used to pursue underbanked consumers and fine-tune decisions at a granular level traditional data sources do not provide.
Whether that means the bank can approve more accounts because there is more data to analyze each individual’s risk, or reduce losses by identifying those who actually pose a significant risk, the option to employ a wider range of predictive data brings great reward.
No matter what banks decide about changing their approach to DDA, they are going to have to focus on a great customer experience. Their customers are looking for value in the services the bank is offering—fees or no fees— and must believe that their bank is working for them. It is a new world for DDA, not the end.
The DDA market will continue to evolve as will the regulatory front. Alternative data can help banks reduce costs, make better decisions, cut losses, approve more accounts and provide a seamless experience for their customers. Bottom line, banks are going to compete and win based on doing business smarter. It’s worth considering new data sources to help facilitate a new day for DDA.
Eric Lindeen is the director of marketing for Zoot Enterprises, located in Bozeman, Mont. His email is eric.lindeen@zootweb.com.
