Shrinking Fee Income Threatens Free Checking

CU360
April 21, 2009 | COMMENTS

Banks are anticipating huge losses in checking-related fees, and they'll need to get creative when it comes to one of their most basic products—the checking account.

"We're at an inflection point in the checking business," according to Sherief Meleis, managing director of New York–based Novantas, reported in Bank Administration Institute's Retail Delivery Insights.. Noting that about half of checking accounts are unprofitable in a good year, Meleis said regulatory and business environment changes could hike that percentage to 75%.

Financial institutions will need to come up with new activation and retention strategies to keep checking customers engaged, or offer value-added products and services to give them a reason to pay fees.

Low usage and lack of interest in other revenue-producing products and services hinder profitability, according to Meleis. For "dead on arrival" accounts, which are opened but hardly ever used, he suggested that financial institutions promote online bill pay and sales incentives based on the accounts' value to the institution.

In the long term, Meleis encouraged institutions to restructure and reprice their checking products to make more sense in the evolving product lineup. Specifically, he recommended appealing to consumer segments based on their deposit, service, and payment behaviors.

For example, one strategy would offer a specific checking product to online banking users who receive ACH deposits and use their debit card frequently at the point of sale. It's an approach intended to appeal to Gen Y customers in particular, as a springboard to other fee-based products and services.

Such innovation is required because of numerous "headwinds" now pushing against checking's status quo. Among those are the ongoing financial crisis and rising joblessness, which are causing consumers to be more careful about avoiding fees. The current rate environment also continues to lower net interest margins.

New regulations aimed at giving consumers the opportunity to selectively opt out of "courtesy checking" overdraft programs could torpedo the income stream from non-sufficient funds (NSF) and overdraft fees. Novantas's research indicates that U.S. banks make about $25 billion annually from these fees.

The fee-less deposit account is particularly endangered in this environment. "Free checking is broken," says Meleis. "With NSF and overdraft fees shrinking, institutions may be left with a narrow range of options: Reinstitute monthly fees, reduce the cost for servicing checking accounts, or identify new revenue streams.