Many banks' checking account business models are being upended by Regulation E-which puts limits on overdraft charges for debit card transactions-and the Dodd-Frank Durbin amendment-which would limit the interchange fees big banks can charge for debit card transactions. Banks generally rely on these fees to pay for free checking accounts and many now wonder if the era of free checking is coming to a close.
No group of vendors is more attuned to these developments than those who specialize in technology to help banks attract customers with free checking and manage these accounts, who may find themselves squeezed by the regulatory developments, facing narrowing margins and possible M&A activity. These companies include BancVue, Pinnacle Financial Strategies, Velocity Solutions, Strunk Financial Services, Haberfeld Associates, BSG Financial and John M. Floyd and Associates.
"These vendors have added value for banks, but it's getting harder to add value" as new regulations clamp down on fees and make checking accounts less profitable, says Hank Israel, a partner at Novantas. "Overall, there will be consolidation." Robert Hunt, a senior research director at TowerGroup, adds that "vendors recognize they have to change reward products and rethink the whole process."
The vendors themselves seem to be approaching the problem in one of two ways, and sometimes a combination of both: roll out new products; and downplay the significance of the new regulations on community banks given that regulators have exempted small banks from the lower interchange fees.
Gabe Krajick, CEO of BancVue, argues that the new regulatory environment presents opportunities for community banks to grab customers from large banks that give up free checking. But there are clearly challenges for community banks as well as his own company. "Fee revenue will be less prevalent," Krajick says. "Anyone who doesn't see that is in La La Land. The question is: what are you going to do about it?"
In response, BancVue, has created MoneyView, a personal financial management tool that allows retail bank customers to manage their rewards online and encourages them to aggregate all their other accounts, even those outside the community bank. "Getting customers to aggregate has historically been the tough nut to crack with PFM tools," says Krajick. "But if you can do it, the world is your oyster."
In a study of PFM usage, Javelin Strategy & Research found that nearly 60 percent of consumers bring at least five different types of financial products into their PFM platform. And the more products account holders manage within their PFM, the less likely they are to leave the institution that provides it to them. Ron Shevlin, a senior analyst at Aite, says he's convinced that BancVue in particular will survive in the new regulatory environment. Not just because of innovative offerings such as MoneyView, but because of how the company funds rewards.
"Big banks are discontinuing free checking because they are stuck in the mindset that interchange fees pay for rewards," Shevlin says. "But at BancVue, interchange fees don't pay for rewards, they fund a higher interest rate for the consumer. If the interchange fee gets cut, they can simply lower the interest rate and still be offering a higher interest rate than most of the industry."
BancVue executives aren't the only ones who still see a promising future for their niche.
"Too many assume Durbin will affect all banks when it's clearly written to protect community banks," says Joe Gillen, CEO of Pinnacle. "We have been advising banks to stay the course and to find value-added products." In December, Pinnacle acquired Granite Starr, a provider of checking products and mystery shopping services for community banks.
To supplement Pinnacle's Reg E and compliance mystery shopping services, Pinnacle will offer Mystery Shopping 2.0, a service that goes beyond measuring sales and service quality to assessing the customer experience and the impact that has on customer loyalty and retention.