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New fees: The 2011 challenge for bankers

There’s an interesting article in Bank Systems & Technology entitled “U.S. Consumers Are Averse to Checking Fees, Survey Finds.” At first glance, the title seems almost tautological; after all, who ISN’T averse to paying fees? Read a bit further, however, and you see that the issue is significantly more complex than just my initial, flippant, “Well, obviously …” response.

Speaking in macroeconomic terms, the demand for deposits is less elastic than their supply. As banks struggle to differentiate, it has become clear that, more often than not, deposits are, in fact, commodities. Consumers will put money where they get the best rate or the best suite of services. Banks have attempted to provide incentives for loyalty, but have met with little success. “Relationship banking” as well as services that serve to anchor customers to a bank, such as automated bill pay and direct deposit, have been able to mitigate this issue somewhat, but the fact remains that bank customers are, more often than not, mobile.

Given the new regulations surrounding Dodd-Frank and the CARD act, as well as the fact that demand for deposits is no longer at as fevered a pace, it’s become a somewhat painful reality that banks are going to need to charge fees. A logical scenario is that new fees are going to lead to net customer attrition. As alternative sources of funding – brokered deposits, CDs and the capital markets – are not nearly as attractive to the banks, deposit supply is more sensitive to price changes than deposit demand.

The question is, how much attrition, and how will that customer attrition affect the income statements and balance sheets of the banks? Finding the answer to that question becomes important when the institutions start to develop their strategic plans for the upcoming year. Knowing how to predict the impact of the influx of new fees versus the resulting exodus of customer deposits is critical, as deposits on the balance sheet have a direct and causal relationship to how much credit the bank can extend. And of course, the amount of credit the bank extends determines the amount of interest income it can expect to generate.

How much attrition?

This question is too broad to be answered directly with any reasonable rigor. To get to something more digestible, banks have to look at some of the driving factors for the expected attrition. Banks can start by asking questions like:
  • Which customers would be most likely to leave? Are those customers most affected by the fees (i.e. paying the most)?
  • Which customers are most likely to stay?
  • What characteristics make up each group?
  • Which services do we currently offer that act as a disincentive to leave?
  • How effective are bill pay and auto-deposit at anchoring customers?

Analytics tells the tale

The challenge becomes how to answer these questions as specifically and accurately as possible. To that end, analytics can play a strong supporting role. Considering the size of the institutions in the article, their customer bases are certainly large enough to start segmenting into populations that they can use as test subjects. The ability to adjust account features and fee structures to one specific group, and compare their attrition rates to a control group of similar accounts, would provide valuable insight for these institutions, giving them the ability to be predictive, rather than reactive, about the impacts their new fees are going to have.

For instance, taking a small subset of the population and finding out the net attrition compared with the marginal fee income when the monthly fees imposed were $4, $5 or $6 would allow executives to make a strategic decision based on an observed sensitivity to the fee price. If a $4 monthly fee causes 10 percent attrition while a $6 fee causes 15 percent, the 50 percent marginal increase in fee income can then be measured against either the increase in funding costs of alternative funding sources (CDs, brokered deposits) or the expected loss of interest income on 5 percent of loan products or some combination of funding cost increase and interest income loss.

The questions are simple enough to ask. The answers are, as usual, more elusive. If banks are going to try and use this sort of framework of customer experimentation, then they will need a robust analytics platform to allow for the proper segmentation of the populations, monitoring of their behaviors and aggregation of their results. With such a solution empowering their decision making, it is possible to get to an optimal solution, or the least painful one.

New fees may be the unfortunate reality for consumers. Although consumers have the ability to move their accounts to other banks, figuring out their predisposition for doing so, and the factors that might affect that inclination, is going to be a key capability that these large banks can develop to analyze the impact of this new reality on their institutions.

Tell me how you are handling this complex and touchy situation: Are you considering a slight increase in fees to offset lost credit card fee income? Do you think that customer education will reduce attrition?

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