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.
Go deeper with GlobalData
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.
“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.”
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By GlobalDataAccording to Moebs,
self-imposed conditions, regulation requirements, and judicial
penalties 
have
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
minimum
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.
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.”
