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Higher account maintenance fees are inevitable, because basic, relatively low-balance checking accounts are simply not profitable on their own.
November 1 -
The attempt by large banks to impose debit card fees wasn't just about wringing a bit of extra revenue out of existing customers. It was an effort by Bank of America and its competitors to rework their basic retail account business model.
October 31 -
Bank of America's recent announcement that it plans on charging most of its customers a $5 monthly fee to make debit card purchases has touched off a firestorm of protest across the country. And for good reason. For most Americans, who have already paid dearly for the economic mess touched off by risky bank practices, this latest fee just adds insult to injury.
October 28
Saturday is Bank Transfer Day, when tens of thousands of people have pledged to close their bank accounts and move their money to credit unions.
The day is important, not because of the dollars involved, but because it's emblematic of the catastrophic PR problem that is strangling the industry's future.
When everyone — from the president of the United States to protesters in numerous cities to the 27-year-old who hatched up Bank Transfer Day — is declaring distrust of banks, or even disgust, it's impossible to execute a profitable business strategy.
Just ask Bank of America, which on Tuesday finally caved and withdrew its $5 per month debit card fee. Something is seriously wrong when the industry cannot recoup the costs of an innovative product that millions of customers love.
What's happening amounts to the reversal of the three-decade trend in which banks have become less dependent on spread income by charging customers for products and services. And that reversal couldn't come at a worse time — interest rates are rock bottom, margins are paper thin and loan demand is anemic.
"This is the really important story in retail banking," said Karen Shaw Petrou, managing partner of Federal Financial Analytics. "The whole business model is breaking apart. Net interest margins have gone to hell" while fee income is evaporating.
Bank Transfer Day got its start early last month when Kristen Christian heard about B of A's debit card fee and posted an invitation to 500 Facebook friends to move their money from banks to credit unions.
The idea took off, and by midday Wednesday 72,356 people had pledged to take part. A Google search for "Bank Transfer Day" yields 63 million hits, including many news stories on Christian, who lives in Los Angeles and is most frequently described as a "former art galley owner." (Prominently displayed on the search results page is a paid advertisement directing seekers to make "a smarter choice" and switch to a credit union.)
The industry needs to find its way to a future in which the president isn't complaining and the Wall Street occupiers go home and art lovers in L.A. are content.
"Once the public tide is against you, the industry really has a tremendous challenge to try to turn that around," said Jo Ann Barefoot, a former federal regulator who co-chairs Treliant Risk Advisors, a consulting firm in Washington.
"There is going to be a complete rethinking of the strategy and risk on fee income and value to the customer," she said. "Banks need to take a hard look at fees."
Among the questions Barefoot said bankers ought to be asking themselves:
What proactive steps, such as teller training and plain English disclosures, are we taking to ensure our customers understand our fees and how to avoid them? Are our fees fair and reasonable and are they tied to a valuable product or are they designed to punish customers?
Do fees closely track costs or are they much higher? Which fees are producing the most income, and are those totals in line with peers'? For fees targeting vulnerable customers such as the elderly or students, are the people selling those products employees or third parties? How well have they been trained? Is the bank monitoring complaints about fees?
Federal law has long barred banks from charging "unfair" or "deceptive" fees and the Dodd-Frank Act of 2010 expanded the restriction to bar "abusive" fees. The new Consumer Financial Protection Bureau will interpret these terms, and that's another reason banks should be examining their fees.
"To win competitively by winning a customer's trust, that's what makes sense today," Barefoot said.
Some see a silver lining to Bank Transfer Day — a purging of price-sensitive customers who are unlikely to contribute much to their bank's bottom line.
But this isn't just about the people willing to switch banks over a single fee. It's about a wave of people — many of them the next generation of customers — who dislike bankers, who think executives are overpaid and underprosecuted and who see little value in having a relationship with a bank.
Winning these customers over — not writing them off — is the solution.
"I do hear the people saying, 'Those are people you don't want in the bank.' That's not what we represent," said Richard Hunt, the president and chief executive of the Consumer Bankers Association. "We do desperately want to keep each and every customer."
The industry's reputation, he said, must be restored "one bank and one customer at a time."
"The way we improve our reputation is keeping our head down and each individual bank reconnects with their customer. It's not going to be a national campaign. It's not hiring Frank Luntz to give us the words to use. It's just going down and reconnecting with our customers."
Huntington Bancshares in Columbus, Ohio, got the message — two years ago.
In May 2009, after the angst caused by the Troubled Asset Relief Program bailouts but long before the Durbin amendment, the $52 billion-asset bank went searching for a way to distinguish itself from rivals.
"We wanted to understand what consumers want, how to win them over and do something they will appreciate," said Mary Navarro, Huntington's senior executive vice president for retail and business banking.
The bank gathered hundreds of ideas and tested 35. The winner: A 24-hour grace period for overdrafts. Any customer overdrawing their account has the next business day to make a deposit and cover it.
"It appealed to everyone, even if they didn't overdraft," Navarro said.
Next came "Asterisk-Free Checking," which is free to open and free to maintain with no monthly balance required. Free identity theft protection came next, and last week Huntington gave its checking account customers free platinum debit MasterCards.
The result: Huntington has added accounts, improved retention and sold more products to more customers.
"We figured it would take a couple years to make up what we were giving up," Navarro said. "But by the third quarter, we were already back."
Annualized growth in the number of households doing business with Huntington is up 11% this year versus 3% in 2009. The portion of customers with four or more Huntington products is up to 72% from 68%, she said. "Revenue is up, service charges are within 1% of where they were a year ago. We feel really good about it."
Huntington is playing for the future, when economic growth resumes and it can lend all those loyal deposits to customers who are ready to borrow again.
"The premise is still the same: take deposits in and loan them out, and the difference is your profit," Navarro said. "We are less reliant on fees; individual products and balances is really what we are doing."
Good old-fashioned banking. Just what the times demand.
Barb Rehm is American Banker's editor at large. She welcomes feedback to her column at
