July 01, 2013
The Cost of "Free"
Many retail-centric banks have found themselves in a fee-revenue dilemma as the impact of regulations regarding overdraft fees and debit card interchange revenue begins to be felt. After decades of providing "free" services to consumers, these banks are under significant customer pressure to continue this practice even as they roll out new products and services. But this pricing model poses financial risk. The operating expenses of the bank are increasing at the same time that the banks are receiving minimal—if any—incremental revenue.
I recently participated in a conference that had a session comprised of a panel of four MBA students. The goal of the session was for the audience of bankers to better understand the driving forces for financial service decisions by the Gen Y, or millennial, customer. (I wrote a bit about this panel in a previous post.) One eye-opening statement universally shared by the panel was the expectation that mobile banking and mobile banking services be provided free of charge. When asked for a justification, they believe that by using the mobile channel they "saved" the bank money over writing a check or going into a branch office. When further questioned as to how the bank was going to pay for the development and operating expenses of such new products and services, their response was essentially that they believe the bank earns sufficient revenue from its lending operations, including credit cards and installment and mortgage loans. I am sure that many other consumer segment groups have this attitude as well.
After Regulation II capped debit card interchange fees for banks with assets exceeding $10 billion, some banks announced they would begin charging a monthly debit card fee. Consumer and media response was so negative that banks withdrew the proposed fee changes. Subsequently, many banks changed their checking account service fee waiver conditions by raising minimum balance requirements, requiring other account relationships (to provide additional revenue support), or eliminating some previously bundled services. The Bankrate 2012 Checking Survey found that only 39 percent of banks were offering free checking without a minimum balance requirement or maintenance fee. This percentage is down from 45 percent in 2011 and 76 percent in 2009. Credit unions have not followed suit—the number of them offering free checking is holding fairly steady at around 72 percent.
Is there anything banks can do to shift consumers' expectations and ease some of the financial risk associated with controlling operating expense levels? We would like to hear from you.
By David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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