A few weeks ago, Glenbrook issued a challenge to Payments Views readers: “What Are the Best Ways for Banks to Replace Lost Overdraft Fee Income?“ Given how significant the financial hit will be (JPMorgan Chase estimates a 2010 impact of $500 million after-tax), we thought we’d at least get some good ideas. Well, we got very few ideas at all, and none from bankers! The no-news-from-banks could, of course, be because banks are keeping their well-laid plans a deep and dark secret. Or it could be …. there are just no good ideas?
What was interesting was that some of the ideas that did come in seem to be more likely to reduce, rather than increase bank revenue – or at least are challenging, to put it mildly.
The ideas that did come in included:
- A suggestion that all banks sell low-balance accounts to non-banks, who would convert them to open loop prepaid cards, and pay banks a revenue share
- A suggestion that banks aggressively pursue decoupled debit, in order to capture interchange revenue from the underlying account bank
- A suggest that banks begin charging fees for basic account services
- A suggestion that banks cross-sell with retailers and/or offer financial planning services
- A suggestion that banks allow contextual advertising within online banking, and charge customers fees if they don’t want to see the advertisements.
Thanks to the people who did contribute. But given the dearth of contributions, and (may I be frank?) the not-so-innovative ideas proposed, we’ve dropped the idea of ranking the ideas or publishing them in full. I did ask my fellow bank-watchers for comments:
“Speaking from the experience of someone who’s first significant contribution to his employer’s bottom line in 1989 was increasing NSF/OD fees from $8 to $10 per item – here’s what I would recommend 20 years later:
- Take as many OD/NSF transactions as possible and move them to an OD credit line. Charge a small trans fee for each item (under $5 each) and a reasonable, but relatively high, rate of interest on the line of credit (APR in mid-to-high teens for good credit). You might even be able to charge an annual fee (under $35) for the OD line. While this only works for credit qualified customers, it puts the fee hit more back in the ATM-ish “convenience fee” rather than the $30+ penalty fee…an important distinction for holding on to the relationship.
- For those that can’t or won’t go with an OD credit line, drive them to a similarly-priced OD-protection “prepaid” account, perhaps starting them with an initial bonus for the first deposit.
- For the rest, use “value-based” OD pricing with a fee no more than 50% of the transaction value (25% would be better) with a minimum under $5 and a maximum no more than $50. Process items in chronological order.
- Finally, encourage everyone to sign up for alerts via multiple email, and especially text-message, low-balance alerts and transaction confirmations.
While this won’t replace the revenue from unlimited $35 OD/NSFs, those fee levels were never going to be sustainable.”
“I think most financial institutions are in the Petri dish phase of their ideas for replacing OD income. This issue is also illuminating the important “where do we truly add value” that financial institutions will be forced to answer in the decade ahead where payment innovations are bound to happen.
I think an important variable in the ultimate “opt in” percentage for POS/ATM overdraft will come down to price. Sure, most will opt out of $27 OD fees at the cash register, but they might opt into a program where the fee is $5. I think we will see the emergence of accepted micropayment OD structures that are more like ATM surcharging or overnight mail costs. Additionally, I think systems that track the value of retail customer relationships will grow more sophisticated. Retail banks will be adding certain behavioral based fees (e.g. bill pay fee if you don’t keep adequate balances) but they will create relationship packages to make sure “A” clients do not get ticked off.
Retail product strategy will continue to reward broader financial relationships and the use of cheaper electronic channels while attempting to levy fees on the “unbundlers” more heavily.”
Banks should recognize – and take advantage – of the fact that consumers at a gut level think the bank is “making money on them somehow”. Rather than pretending that this isn’t the case, banks should be more transparent and more “deal-oriented” to the consumer. Some ideas under this umbrella would include:
- Offer (in the manner of wireless “hotspots”) prepaid packages of “tickets” for OD coverage – buy 10 for $5 each, for example.
- Offer multiple-day OD coverage to help consumers with tough times of the month: a two day pass up to $X for a fee of $Y; five day coverage for $Z, etc.
- Tie reduced overdraft fee rates to paper turn off for statements
- Offer “account analysis” on retail accounts – similar to what is done for corporate accounts – showing consumers exactly the value of their balances for the previous month, and relating this to fee schedules.
And finally – this situation reminds me – painfully – of what happened in the late 1970’s when corporations woke up to the value of the balances in their bank accounts. At the time, I was a lending officer for global multinationals at a top three bank. Our largest clients had historically left millions of dollars in interest free balances at the bank – as a rough form of compensation for all the many things (including payments services) the bank did for them. Once rates spiked, companies started pulling those free balances out – and never returned them. Believe me, there were many strategy tasks forces around replacing this revenue. But at the end of the day the lesson was: ”windfalls are nice, but when they go away, they’re gone!”
We’d still love to hear from any bankers on this topic! Post your views below.