Bank transaction services such as checking accounts are predominantly priced at a flat rate, such as x dollars per month. This form of pricing stifles innovation that can increase customer value.
Think of AT&T. Ma Bell once provided most of the telephone service in America through local subsidiaries. There was little need for marketing, since telephones were a monopoly. AT&T found that customers preferred to pay a fixed monthly amount, so that’s what the local companies sold. You could use your phone all day for local calls, or not at all, and pay the same amount.
It was simpler for AT&T, and its regulators cared only about the total revenue, not about which customers paid how much.
But the new Consumer Financial Protection Bureau is very unlikely to think that way.
If you’re not going to be able to get more revenue by having customers buy more, then there’s no need to add more value.
What an earlier banking statesman, Walter Wriston, called “Fortress Banking” has converged to this same kind of pricing for services dominated by banks.
A customer can write no checks or 50 checks. Same monthly fee. You can pay no bills and make no person-to-person payments, or you can make 50 bill and other payments. It’s even OK if all these transactions require printing a check and paying postage. Bill paying is still “free,” bundled with the checking account. It’s simpler that way. Customers like it.
Retail securities businesses have gravitated in the same general direction. If you have ample assets, you can have 100 free stock trades. Customers don’t like paying for trades.
In all these cases, as transactions become cheaper with the shift to less paper and more electronics, flat all-in pricing helps to preserve profitability.
But all-in pricing has severe disadvantages. Because of this setup, most of the energy going into innovation aims at reducing costs, not increasing customer value. So we have check imaging and electronic statements, which don’t add value for customers. The impetus for mobile payments and for remote deposit, two value-added services, comes from vendors outside the banking industry.
Also like utilities, banks use outsourced customer contact processes. Contracts are such that neither the bank nor the outsource firm sees benefit in making improvements that could increase revenue by adding value for customers. “We wouldn’t make any more money by providing additional features and increasing customer revenue,” one of the largest outsource firms told me. So innovation to create value doesn’t happen.
Besides the revenue from all-in fees, banks obtain substantial profit from punitive charges, such as overdraft, non-sufficient-funds and late fees. All of these are becoming increasingly controversial, and the CFPB will push the major ones back toward cost.
We need to work to replace this shrinking revenue.
Banks ought to focus on developing add-on services for which customers will voluntarily incur additional fees. For instance, do bill-payment services really have to be plain vanilla? Isn’t there something additional that many customers would pay for? Of course there is.
To start with, many customers would like all or most of their bill payments — other than those incurring late fees — to be received nearly (but not quite) a month late, so that no delinquency would show at the credit bureaus. There’s an opportunity to build a business on deferring payments.
If something other than increased interest rates is to make transaction services profitable again, we’ll need to design, implement and deliver more of what customers want.
Then we can break out of the lockstep of $5, $10 and $15 monthly fees — and the cost pressures that these fixed revenue streams inevitably generate.
Here’s a dramatic example. The majority of a typical bank’s “good” checking customers don’t even qualify for any unsecured credit at their bank. They are offered, at best, the unattractive opportunity to borrow their own money and pay both periodic fees and interest — a secured credit card.
Let’s give these people an opportunity to build their credit through the payments they make.
Let’s also show them concretely what they need to do to get guaranteed access to significant credit on attractive terms. Maybe many of them won’t get all the way there very quickly, but making progress toward aspirations can be satisfying.
Another example is protection services, such as credit monitoring or data breach alerts. In the past, independent vendors have piggybacked on banks to market these — not always very efficiently or even honestly. (Remember Compu-Card, later acquired by Cendant?) Why aren’t even the largest banks motivated to leverage their relationship knowledge to develop services that meet more customer needs?
We’ve seen that even necessity — namely, poor profits — isn’t going to midwife the needed invention. Maybe sound strategy can.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at firstname.lastname@example.org.