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March 30, 2011updated 24 Jan 2022 6:53am

Pricing, rewards carousel to accelerate

Achieving that critical balance between a viable revenue level and a satisfied customer base is about to get much more difficult for US banks, who are introducing new fees, ending rewards programmes and substituting new perks in one of the most frenetic periods of product change in recent history. The aftershocks of the US government's crackdown last year on debit card overdraft fees, coupled with new current account regulations instituted by the Fed and the Federal Deposit Insurance Corporation, has resulted in fewer large US banks sticking with free checking. According to the latest data from economic research firm, Moebs $ervices, only about half of Wall Street banks are now offering free checking to new customers, a decline of 13.6% in just six months.

By Charles Davis

Achieving that critical balance between a viable revenue level and a satisfied customer base is about to get much more difficult for US banks, who are introducing new fees, ending rewards programmes and substituting new perks in one of the most frenetic periods of product change in recent history.

 

Bar chart showing US customer intentions regarding account switchingThe aftershocks of the US government’s crackdown last year on debit card overdraft fees, coupled with new current account regulations instituted by the Fed and the Federal Deposit Insurance Corporation, has resulted in fewer large US banks sticking with free checking.

According to the latest data from economic research firm, Moebs $ervices, only about half of Wall Street banks are now offering free checking to new customers, a decline of 13.6% in just six months.

“There is a fundamental consumer shift going on in the banking sector,” said Mike Moebs, economist and CEO of Moebs $ervices.

“This shift is going to move about 13m checking accounts to community banks and credit unions by the end of 2011.”

According to Moebs, self-imposed conditions, regulation requirements, and judicial penalties Bar chart showing how important free checking is to US customershave levelled the ability of the larger US banks to provide free checking to the average consumer.

“It costs about $300 on a fully absorbed cost basis to operate a checking account, and with fees falling below these costs, the average checking account at a Wall Street bank is unprofitable.

“Because Main Street financial institutions can operate below the $300 cost level, they can turn a profit and will continue to take market share away from the larger banks,” Moebs said.

Minnesota-based US Bank said it expects to change checking account pricing and charge debit card fees soon, joining JP Morgan Chase, Bank of America and Fifth Third, who have all introduced checking fees in recent weeks.

In March, JP MorganChase imposed a $12 monthly service fee on checking accounts with Pie chart showing bank customers currently holding a free checking accountminimum daily balances under $1,500. Customers can avoid the fee by taking certain actions, such as making at least one direct deposit of $500 or more. Wells Fargo, which owns Wachovia, replaced its free checking account with one that levies a $5 monthly maintenance fee and a $6.95 monthly online bill-pay fee. Those fees can be waived with a $1,500 balance or qualified direct deposits.

PNC recently began notifying account holders that it will no longer give free checking customers reward points for debit card purchases. The bank will also end reimbursements for fees incurred at out-of-network ATMs.

PNC, which operates 2,500 branches in 15 states and Washington, DC, said it will continue offering free checking accounts with no strings attached, such as minimum balance requirements. About 70% of the bank’s five million customers have free checking accounts.

Bank of America is testing new fee structure for its checking account service, which also used to be free. The new pilot programme for customers in Arizona, Georgia and Massachusetts allows them to apply for various account types with monthly fees ranging from $6 to $25. The bank plans to expand the programme nationally later this year.

Bar chart showing US customers' intentions to switch if account conditions are amended

Bank of America introduced four types of checking accounts:

  • Essentials: a basic account with a monthly fee and a debit card;
  • eBanking: accounts with no fees if the customer opts for e-statements and makes deposits and withdrawals online or by ATM;
  • Enhanced: accounts that carry a fee but only if a customer falls below a minimum $2,000 balance; and
  • Premium: accounts, which require a minimum $20,000 balance and provide free money orders and check printing.

Moebs said that the return of so-called ‘Regular Checking’ – accounts that charge a monthly fee if a certain balance is not maintained – are making a tremendous comeback across the country.

Regular checking accounts increased from 25% at all depositories in July 2010, to 28.6% in February 2011. The median fee for falling below the minimum balance required for all financial institutions was $6. This monthly fee increased for the Wall Street banks but decreased for Main Street financial institutions.

Banks embraced free checking about 10 years ago as a way to attract new customers in a hypercompetitive market. They could then cross-sell more profitable products and services, such as mortgages, car loans, credit cards and investment products. Those days are rapidly coming to an end.

The conundrum lies in the fact that American consumers are accustomed to free checking and will leave if their bank starts charging for it.

A nationwide survey of US banking customers by Acton Market Intelligence reported that 87% of American adults aged 18 and older have a free checking account.

Free checking appeals equally to men, (87%) and women, (86%) but differences arose with regard to the sexes when asked if free checking was critical or very important to them, with 92% of women stating that it was, versus 79% for males.

Looking at the data from an age group perspective, some variation occurred among younger consumers. For example, 94% of females aged 18 to 24 have a free checking account compared to 80% for males in the same age group.

The opposite is observed in the 25-34 age group, with 91% of males having free checking compared to 78% of females. Parity was reached in age groups 35-44, 45-54, 55-64, and 65 plus.

Acton found that a majority of free checking customers (58%) would likely switch to another bank or credit union to retain free checking should their bank or credit union eliminate their free checking account by re-pricing it. Slightly less than one in four (23%) customers would passively accept the implementation of such fees by their bank or credit union.

If lenders were to keep free checking, but raised the minimum balance levels required to keep free checking, over half (56%) of the country’s checking clients would increase their balances in order to comply and continue to receive free checking. However, one in three (38%) cite they would switch as soon as possible if such a minimum-balance requirement was instituted.

At a macro level, the penetration of free checking accounts showed parity among the four census regions consisting of the North-East, South, Midwest, and the Western states.

When asked what they would do if their bank or credit union started charging a fee for free checking, those answering that they would switch banks as soon as possible varied significantly by region.

Current account customers in the North-East region are the least likely to switch (at 50%), while 66% of those living in the West region would switch immediately.

At the macro or national level, penetration of free checking falls in a narrow range of 82% to 91% among the four income ranges of less than $30,000, $30,000-49,000, $50,000-99,000, and $100,000 plus.

Perhaps most interesting is that free checking penetration is a bit higher among those in the two higher income ranges.

According to Acton, less than 3% of all checking customers in America feel free checking is unimportant. The fee strategy that is least likely to cause account switching is free internet and mobile banking, with a fee for paper transactions.

Less than half (49%) of the checking customers said they would likely switch institutions if such a strategy was implemented.

The fee strategy that is most likely to cause account switching is charging a fee for the number of debit-card transactions in a given month (with 60% stating that they would switch).

“We tested a number of unique re-pricing scenarios to determine the impact each one would have on a free checking customer’s likelihood of switching to another financial institution that continues offering free checking,” said Acton Marketing CEO Brian Beach.

“We were surprised to discover that regardless of the re-pricing approach a bank or credit union takes, at least half or more of its free checking customers are likely to switch banks. “We see this as a very positive opportunity for the smaller community banks and credit unions that stick with the free checking.”

Bar chart showing US overdraft revenue for US financial institutions

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