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A Farmville approach to bank fees

By Claes Bell ·
Thursday, September 8, 2011
Posted: 6 am ET

As you'll see in our upcoming 2011 Checking Study, free checking accounts are quickly becoming hard to find, especially at big banks. Banks are dealing with the loss of lots of juicy overdraft income as a result of the "opt-in" rule in Regulation E, and they're about to lose even more in "swipe fee" income when the Durbin Amendment kicks in Oct. 1.

In response, they're imposing broad-based new fees on checking customers to keep their checking account divisions profitable. An interesting commentary by Bob Giltner of BAI Banking Strategies argues this one-size-fits-all approach to selling checking services is not only antiquated, it's bad business:

For example, banks are attempting to resurrect these strategies of yesteryear by bundling specific services for a fee or imposing flat, all-inclusive maintenance fees for accounts unless balance or activity hurdles are met. Internally, FIs justify these approaches as the required profit for low-balance or low-activity consumers in the new Dodd-Frank and Durbin Amendment regulatory environment. However, justifying these fees presents challenges since customers remember when the products and services used to be free.

At least 10 percent of profitable consumers shift away from financial institutions that impose these fees. The results of this pricing approach are well documented by any number of industry research studies such as one recently conducted by Bankrate Inc.

We recommend a different approach: premium add-on service pricing, not bundled into products but as stand-alone units. This strategy will increase revenues to more than offset any lost income, enable you to keep your current relationships, win new ones and allow you to keep free checking. Under this approach, the customer can pick and choose which services to add on to the very basic, free package, and pay for those services accordingly. All-inclusive feature bundling inherently devalues and blurs the strengths of the individual services in the package. Specific add-on features highlight the functionality the buyer values most.

In short, it's a Farmville approach to checking account pricing: free to play, but if you want anything beyond the basics, you have to pay a small amount. Want to earn frequent flyer miles with your debit card purchases? That's $2 a month. Want overdraft protection? That's $5 a month, plus a small fee for each overdraft. Want to pay no foreign transaction fees on debit purchases? That's $10 a month.

Giltner says that about 1/3 of banking customers would probably be willing to sign up for premium services beyond bare-bones free checking, and that would be enough to make up for the losses to fee revenue the industry faces from regulatory changes.

I think Giltner's ideas have some merit. As a certified tightwad, I'm skeptical that 1/3 will pony up for premium services, but I think he's right that it's better, and probably more profitable in the long run, to sell people new products than try to get them to pay for something they're used to getting for free. For the type of upper-income, financially savvy customers banks are courting, adding extra fees for no additional value because you think they won't notice just isn't going to fly.

Instead, tailoring checking account services to an individual and charging a premium for some of those services is an approach that not only offers some growth potential for banks, but also avoids alienating your most valuable customers.

What do you think? Would you pay for premium checking services? Or do you prefer just a flat fee for everyone?

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1 Comment
Eric Lindeen
September 16, 2011 at 3:22 pm

Great observations. As a fellow tightwad, I've already begun thinking about how I migrate some of my accounts. The Farmville approach offers a lot of value to those seeking to avoid fees, but comes with a painful overhead for managing the accounting. Accurate billing is already a challenge for many institutions. In defense of the flat fee, many consumers are less interested in their bank account structure than in getting a new cow in Farmville. The flat pricing allows consumer to make a simple choice once, then have access to all the services they might need. I know more than a few spendthrifts who would clearly prefer this model.

I think the real solution lies in providing value to primary account holders in reduced fees. As Bob Giltner implied, if they problem lies with low-balance and low-activity consumers, then the fee structure should charge more for accounts that are underutilized and unprofitable. Consumers with more profitable activities should pay less. Either way, banks should be very careful to reward the behaviors they want. I discussed this challenge in a piece about the importance of being the primary account to improve profitability.