What’s Your Tree?

A while back, Seth Godin had a post about the Dip in the publishing industry.  He talked about how the publishing industry was still basing their cost calculations completely around the use of paper.  One example he gave was how Amazon was charged the same for ebooks and paper books by publishers.

Now, of course if you’re getting a book in electronic format, there is no paper involved at all.  Guess this is why some authors are self-publishing ebooks, which have a lower cost, but higher profit margins.  Seth made the point that a lot of people have built their lives around the use of trees in this industry.  “As a result, the industry is over.”

Reading the article made me think about the banking industry.  What is the “tree” in our industry?  Moving to electronic channels is better for the industry as a whole.  Typically, the banking industry has embraced technology.  We’re always looking for ways to make processes more efficient and less costly.

Peer-to-peer lending and mobile payments can even be seen as a plus.  Yes, the industry may get into the game late, but once we figure out how to make a buck, we’ll jump right in.  The one thing I came up with was…fees.

Well actually, I mean the “you screwed up, so we’re going to charge you” fees.  These are mainly those wonderful overdraft protection, non-sufficient funds and foreign ATM fees.  People are really starting to voice their displeasure with these fees.  Customers are especially ticked when they are charged a NSF because of how their bank processes their deposits and withdrawals.

I know I was pretty pissed off when Bank of America charged me a fee for moving money from my savings account to my checking account to cover a check.  Before calling the bank, I first read the details of my account type.  Once I saw that a fee could be assessed, I vowed to never be in that situation again.

Now being a programmer, I know that it’s trivial for the bank to transfer that money for me.  But charging me $25 to move money from one of my accounts to another?  That seems like a high price to pay for a courtesy.

Interestingly enough, there is a new channel coming that will force banks to change their fee policy.  Mobile banking.  Most banks that have mobile banking have rolled out the mobile web.  In the future, I see them moving to SMS alerts.

Visa is already deploying a SMS alert pilot with a few credit card companies.  As the larger banks come on board (and believe me, a few of the big ones have already started down this road), the smaller banks and credit unions will have to follow suit.  Once their customers have a constant update of their balances, do you think the NSF fee income will begin to drop?  Especially when they can transfer money in their accounts by using their phone?

One of our VPs mentioned this already.  But I see mobile banking becoming a must have channel.  It won’t be just for the 20-35 year olds either.  There are plenty of small businesses and commercial customers that would love to have these constant updates.  The 36-50 year old demographic would be pretty open to alerts also.

So the question becomes, what will you do when you’re getting 10-25% of your current fee income?  Adding these new electronic services can be pretty expensive.  Mobile banking isn’t cheap.  Banks and credit unions are now seeing just how expensive offering free bill can be.

I’ve always wondered why customers aren’t charged for “premium” services.  For example, commercial customers are charged for extra services.  In some cases, they can earn “credits” to offset those fees.  Why can’t that be done on the retail side?  For instance, if you offer free bill pay, why not charge if the customer does less than two bill pays a month?

I know Bank of America set the industry on its head when they began offering free bill pay, but it is becoming an expensive service across the industry.  I know our bill pay costs have been brought up a few times in meetings.  Offering free services reminds me of new entrepreneurs pricing their goods/services.  There’s a saying that there is always someone more willing than you to go out of business by lowing their price.

Most business owners don’t try to compete with Wal-Mart on price.  They use value-added services that Wal-Mart can’t provide.  Smaller FIs can’t always compete with the big boys by also offering free services.  Their economies of scale will beat you in the long run.  But you can compete by using value-added services.

So many FIs claim “they have better service” than the big FIs.  The time is coming where you just may have to prove it.  Planting that seed now will help in the long run.  One of my colleagues mentioned that he brought up charging customers for mobile banking.  His CEO didn’t agree and “kicked him out of the office.”  So far, no one in the US is charging for mobile banking. Currently, banks in Australia and South Africa (the poster child for value-added fees) are charging for mobile banking.  Banks in England have seen the writing on the wall and are beginning to charge also.  Who will be first in the US?

Regardless of who blinks first, one thing is certain.  With rising costs in electronic channels and the new services being added, we are quickly approaching an impasse.  That “bad fee” tree is beginning to look like firewood.