This week, we are speaking at the Branch Banking Symposium sponsored by US Banker and American Banker. Our topic focuses on the emerging opportunity to link the retail branch system with wealth management opportunities. Developing this area provides many banks with a solid growth opportunity.
Overfeeding on Fees
However, one topic that is not on the agenda, may represent an important earning and reputation risk that some banks appear to be ignoring: Has the pursuit of fee revenue gone too far, taking banks down a cloudy ethical path?
The May 2nd edition of Business Week features an article titled, “‘Protection’ Racket? As Overdraft and Other Fees Become Huge Profit Sources For Banks, Critics See Abuses.” Of course, when “critics” examine banks some will always see abuses. Nevertheless, in this case the article raises real concerns both for those banks mentioned as well as the larger industry.
The article begins with the sorry tale of a student who overdrew his checking account using his debit card. The bank approved each transaction, charging him a $31 fee each time, “or a hefty $217 in fees for his $230 worth of purchases.” The hapless customer said he had not requested the overdraft protection and stated appropriately, “I can’t help but think they wanted me to keep spending money so they could collect their fees.”
The article goes on to cite the linkage of service fee income increases to the advent of “free” checking. One source states that 30 percent of banks offer free checking, up from 18 percent six years ago. With free checking often comes bounce protection, estimated to generate $8 billion in bank income or 30 percent of all bank service fees. But some banks may be overdoing “bounce,” causing the Fed, Comptroller of the Currency, and the FDIC to warn banks that they “should not market the program in a manner that encourages routine or intentional overdrafts.” However, the fact is that many banks make a living off the routine overdraft customer.
Reputation Risk
Consumer advocates and the government seem particularly focused on the tendency of these fees, by their nature, to fall on lower income customers. The article quotes one banking analyst who asserts that the “poorest 20 percent of the country’s 135 million checking account customers generate 80 percent of the $12 billion in overdraft fees.”
Federal and state regulators and customer advocacy groups are beginning to circle around this issue. Those banks that have become dependent on charging putative fees risk reduced earnings and a besmirched reputation within their communities.
Taking the High Road
The article presents one bank as the customer’s friend, a position that we think more banks should strive for: “But some banks don’t charge for overdraft protection–and execs at those banks say plans with fees gouge customers. ‘It’s outrageous,” days Dennis DiFlorio, president for retail banking at Commerce Bancorp Inc. in Cherry Hill, N.J. ‘It’s not just about customer convenience. It’s just a way for banks to make money off customers.’ Commerce and others cover overdrafts automatically from savings and other linked accounts, or even charge customers’ credit cards–all without fees.”
Banks like Commerce may be giving up on a short term earning improvement in order to better serve customers and do the right thing by them. Obviously, they believe the long-term payback more than justifies the short-term give-up.
We are not suggesting that a bank walk away from a fee opportunity. Banks need to consider whether they are truly providing full fee disclosure to customers in as straightforward a way as possible. A bank can differentiate itself by effectively describing in simple terms how it deals with overdrafts and what they cost. Perhaps of greater value, they can be proactive in communicating to the customer steps that the customer can take to avoid generating those charges. The message can be that the bank wants to be of service while saving the customer money, rather than “we want to get as many fee dollars from you as possible.”
The Customer is Not (That) Dumb
Just in the last few days, the American Banker published an article that suggests that consumers are wising up to bank charges. The article cites a number of community banks with lower service charges on deposit accounts, in part because of a decline in bounced checks: “Customers are getting more educated about such charges and, as a result, are overdrawing their accounts less frequently.” Inevitably, the free checking/bounced check bonanza will decline in importance for most banks.
The long-term retail winners will be those that forge relationships and tie in the customer through a multi-product revenue stream rather than those that nickel-and-dime the customer, hoping against hope that they can fool some of the people all of the time.
Commercial bankers have long enjoyed a favorable reputation in comparison with investment bankers and insurance and investment brokers. Unfortunately, the pursuit of short-term profits can undercut that reputation and erode the likelihood of building long-term loyalty.