Posts Tagged ‘Overdraft Fees’

The Death of Free Checking

January 2, 2011 Leave a comment

All I wanted for Christmas was for someone to sit down with me and explain how a checking account was profitable.  Well, I didn’t get that present, and I still don’t know.  Now, I don’t really believe that free checking accounts will go away.  But I do believe that banks and credit unions that continue to focus on checking accounts may go the way of the dodo.

Changes in banking laws have done nothing but hurt the profitably of checking accounts.  In the past, fee income and interchange fees drove the focus on this account type. Now, overdraft fees have been drastically reduced.  It also looks like a law will be passed that will limit the amount that can be earned from interchange.  But as they say, trouble comes in threes.  Number three will be mobile payments.

This summer, iPhone 5 will hit the market, and along with it, NFC capable phones.  Although the Android based Nexus S is NFC capable, it’s not currently being used with mobile payments.  Apple will change that.  Even with “antennagate”, Apple has sold close to 6 million iPhone 4s.  A newer phone that fixes the old problems and adds NFC will be big.  The kicker would be offering the iPhone on Verizon’s LTE network.

With all of this pushing down the profitably of checking accounts, why would banks and credit unions continue to focus on them?  I think the industry has it wrong.  Checking accounts are the razors, savings accounts are the blades.  If you look at the history of the industry, savings and loans are how we made money.  Fee income from checking accounts was just the gravy and caused the industry to get lazy.

Once it got to the point that fee income became the focus, the beginning of the end started.  The interesting thing is, customers seem to be most interested in savings and convenience.  According to one poll*, customers that signed up for Bank of America’s “Keep The Change” and Wachovia’s (Wells Fargo) “Way 2 Save” programs did so to build their savings accounts.  Of course, the banks most likely did it to build their interchange fee income, but they also built up their deposit base.

I am definitely in the savings and customer convenience camp.  Apparently, I’m not the only one.  At the end of the day, banking is a service industry.  Focusing on customer needs is what built the industry.  Now, it’s what will save it.

*The people surveyed consisted of me (BofA customer) and a cousin (Wells customer).  See, you can find a statistic for anything

Photo from Ziggy on

Too Much Like Right

May 17, 2010 3 comments

Carol Benson’s post, Memo to Bankers: A Customer is Someone Who Pays You, on PaymentsViews brings up some interesting points.  Here’s an exerpt:

I think the underlying problem that banks are dealing with is that too much of their retail customer revenue is hidden – that is, their customers don’t know they are paying it.  It seems to me that you really don’t have a customer unless the customer is making a conscious decision to pay you.  Otherwise, you have some other kind of business – sort of like a trading business.  There’s nothing wrong with that as a business – the problem is that if you fool yourself that your customer is “buying” your business, then your management framework is going to get seriously out of line.

Katherine Burger’s post, New York City’s Underbanked Population: Growing and Mistrustful of Banks, on Bank Systems and Technology could be considered as the other side of the customer coin.  Here’s an excerpt from that article:

According to the study, concern about bank fees such as overdraft or monthly fees, is the main reason unbanked residents do not use banks or credit unions. This is a somewhat ironic development, considering that, according to the study, residents in just two New York City neighborhoods ” Jamaica, Queens, and the Melrose section of the Bronx — spent more than $19 million a year on check-cashing fees. But speakers at the forum emphasized just how extensive distrust of traditional financial institutions continues to be.

Now, let’s look at these two posts for a moment.  One one hand, you have  “hidden income” because customers don’t realize how they’re helping their bank/credit union make money.  On the other hand, you have potential customers that avoid banks/credit unions because of this hidden income.  Customers that go to check cashing or pay day lender businesses aren’t upset by the fees because they know what they’re paying upfront.  Banks and credit unions list their fees in handy-dandy brochures and disclosures.

What’s interesting is, the conclusion in the BS&T post is offering an account that “for the first two years, includes no overdraft fees, no monthly fees (provided minimum balances are met), minimum balance requirements of $25 or less, and an ATM card”.  Is it me, or did they just completely miss the point?  And why the heck do they only offer an ATM card and not a debit card?  There is no overdraft protection, so the transaction would be declined.  Customers, potential or current, don’t particularly want to deal with the whole “hidden fees” that are attached to accounts.  There’s a reason Congress is making overdraft opt-in now.

What exactly is wrong with charging fees for services instead of “whoops fees” anyway?  The alternative lending industry seems to be making money hand over fist, all because they post their fees and services front and center when you walk in the door.  I wonder how much the banking industry would change if they posted their fees up front and actually charged for their services?  None of this silly fee schedule only in the brochure/disclosure stuff.  No one reads that stuff anyways, and customer complaints about fees prove that.

I never thought I’d say it, but I miss the days before free checking.  Granted, I hated paying a monthly fee for my checking account, but it made me a better manager of my money.  I also made sure I did the correct things in order to avoid that fee.

So maybe we need to get back to the days of charging a monthly fee and doing like Bank of America and drop overdraft protection altogether.  Terence Roche has a great post on Gonzobanker about retail account analysis.  I think this is the direction we need to be heading in.  Being upfront and charging for services is one of the best ways a bank/credit union can survive this current crisis.  But then, that’s too much like right.

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