PNC's Demchak Calls Consumer Banking Model Broken

CARLSBAD, Calif. — William Demchak, the president and soon-to-be next chief executive of PNC Financial Services Group (PNC), says that the consumer banking model built on free checking accounts is broken, and that banks must start a dialogue with consumers about paying for such services as mobile banking.

"We have a model that fundamentally needs to change and we need to fix it as an industry," Demchak said Thursday at a retail banking conference here hosted by American Banker. "Free checking is the bread-and-butter of the business but it was paid for by fees not seen by customers, by swipe fees and overdraft fees. We basically had a subset of clients paying for our core product."

New laws passed in the wake of the financial crisis have set restrictions on overdraft fees and caps on debit interchange fees, and those two changes combine have taken roughly $12 billion in annual revenue out of the banking system — with nothing to replace it, he said.

Yet instead of finding new revenue sources, banks instead are reverting to the old playbook of cutting costs and eliminating bank branches — a strategy he said will not solve its fundamental problems.

Early in the speech, Demchak cautioned audience members that he was bringing up a subject that "every bank out there has thought about it, but no one is talking about it," and he acknowledged that some bankers might be angry at him for doing so.

While many bankers cite new regulations or the sluggish economy as their primary challenges, Demchak said that an even bigger hurdle could be figuring out how to charge customers for products and services that banks currently give away for free.

Demchak claims that many young banking clients might have been willing to pay 25 cents per mobile transaction or $2 for a mobile app, but now will put up resistance because they are not used to paying for such services. The most infamous example of a bank trying to charge for a previously free service, of course, was Bank of America's (BAC) attempt in late 2011 to charge debit card customers a $5 monthly fee. Rival banks quickly seized on the news, running ads reiterating that they did not charge for debit card usage, and B of A quickly retreated.

"It's really hard to throw a new fee on an old product, it comes with a lot of backlash," Demchak said.

Still, he said, newspapers, cell phone companies and cable TV operators are some of the industries that have bundled products to meet the challenges of technological change. Many bundle products bit still allow consumers to see the prices charged individually and even to pick which products they want.

"Why hasn't banking gone there?" he asked. "We built a product" — mobile banking — "and gave it away. Never in the last few years have we had a conversation with our clients about what the product is worth."

Cathy Nash, the president and CEO at Citizens Republic Bancorp (CRBC) in Flint, Mich., agreed that the industry has created a "generation of consumers who think everything is free."

However, she said, there are ways to generate fees without alienating customers. She pointed, for example, to Huntington Bank's (HBAN) program in which it alerts customers that they have overdrawn their accounts and gives them 24 hours to replenish the accounts without penalty. Only if they fail to do so will Columbus, Ohio-based Huntington assess an overdraft fee.

In his speech, Demchak also said that branches will remain an important part of the banking landscape. Though PNC is among the companies pruning branches — it announced last week that it will close 200 this year — it's also continuing open branches in markets it views as desirable.

According to Demchak, the most profitable bank customers still tend to use branches.

'I'm not at all in the camp that branches are going away," he said.