Retail Bank Pricing
Resetting customer expectations
Since 2010, a number of banks known for offering “free checking” have begun to charge for checking account services. But, in at least one instance, when this pricing change resulted in customer defections and reduced service-fee income, the institution reinstated the free-checking policy.1 Similarly, other institutions are also reconsidering their plans to impose new fees on checking accounts.2
Of course negative customer responses to fee increases do not affect all banks to the same degree; some can rely on other business segments to offset changes to their retail banking operations. Moreover, some institutions may not have the strong brand identification with free checking that others do and as a result, may not experience as much account attrition when service charges are increased—especially if the customers have a strong appreciation of the value received from their overall checking account relationship.
But many banks in the U.S. are under substantial pressure to reconsider the economics of retail banking, especially given reduced income from sources such as debit interchange and overdraft fees. Service charges on deposit accounts, one measure of such income, have fallen both in absolute dollar terms and as a percentage of operating revenue (Exhibit 1). And in the context of recent declines in average net interest margins, banks are likely to need fee income more than ever (Exhibit 2). To be sure, cost cutting may play a large role in this effort, but it is safe to say that sustainable solutions will also probably involve the revenue side of the equation.
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1Victoria Finkle, “Changing Its Mind on Free Checking; TCF has done away with the fees it implemented in 2010. Will other banks follow suit?” American Banker Magazine, September 1, 2012.
2 Shayndi Raice and Robin Sidel, “Bank of America Backs Down on New Fees,” Wall Street Journal, November 30, 2012.