June 27, 2012

This past November, consumer outrage over bank fees seemed to reach a fever pitch. Several banks -- most notably Charlotte, N.C.-based Bank of America -- announced that they would charge fees for debit card use, only to quickly rescind those fees before they were even instituted. A major reason for the reversal was consumer backlash against the fees, which culminated in the infamous "Bank Transfer Day," a grassroots movement seeking to compel consumers to move their money out of big banks and into credit unions and other community institutions.

The ill-fated push for debit card fees was due in part to a change in revenue generation for banks brought upon by regulation. The Durbin Amendment, part of the Dodd-Frank financial reform law, caps the amount that banks can charge retailers for swiping their debit cards to an average of 24 cents per transaction, instead of the previous industry average of 44 cents. Many of the banks that proposed debit card fees said they were intended to make up for revenue lost to Durbin; according to Bank of America, the new interchange rules could cost the bank $2 billion annually.

But Durbin is not the only regulatory measure limiting traditional bank revenue streams. The Consumer Financial Protection Bureau earlier this year announced that it would be looking into bank overdraft fee practices. The consumer watchdog agency said the inquiry is designed to examine whether banks are making it clear to their customers how the fees work, and if banks are purposefully manipulating the system to increase the frequency with which consumers are hit with overdraft fees.

[Dissatisfaction Still Looms 6 Months After Bank Transfer Day.]

These are just a few examples of how regulatory statutes and changing consumer attitudes are forcing banks to rethink revenue generators. While this may seem like difficult times for banks (and for consumers who are afraid of new fees), however, the shifting landscape actually opens the door for forward-thinking innovation, according to many industry participants. By taking a page from Apple and other successful consumer brands, they say, banks can offer value-added services that customers are happy to pay for instead of enforcing the types of punitive fees consumers have come to dread. In addition, ongoing branch transformation efforts offer banks opportunities to boost revenue, many experts note.

There's Value in Alternatives

Banks will likely have to pursue a combination of strategies to replace traditional revenue streams, says Bart Narter, SVP of the banking practice for Boston-based analyst firm Celent. Narter notes that banks are starting to offer more services based on increasing convenience for customers that come with a small charge, something they will need to do to greater effect going forward as revenue generated from fees starts to dry up.

"There's any number of little services banks can offer," Narter says. For example, some banks have begun charging for expedited bill pay services for when a customer needs to pay a credit card bill or make a car payment on the day it is due and doesn't have time to wait for the payment to clear. Banks also can offer extra security controls on an account, such as identity theft protection, for a small monthly fee, Narter adds.

According to Narter, banks also will begin to offer what he calls "experimental accounts," in order to attract more customers or to upsell existing customers. These offerings can include "bundle" accounts, such as a small business checking account tied to a personal checking account, or a "barebones" account like a free checking account that requires the customer to get e-statements and has no extra features. "That can get someone in the door," Narter says.

One service for which many banks already are charging -- and will continue to expand on -- Narter adds, is personal financial management (PFM). As banks look for new ways to create revenue, he says, he expects them to begin offering more PFM services, taking on a role more akin to a trusted financial planner or adviser than to a traditional bank.

Maria Coyne, EVP, consumer and small business banking, at Cleveland-based KeyBank ($88.7 billion in total assets), says plenty of untapped opportunities to expand PFM services exist. "PFM is a big part of our business today and will continue to get bigger," she comments.

Coyne says as banks continue to build an integrated, multichannel approach to their services, more consultative product offerings will become the norm. "Today you can get a text alert when your checking account balance drops to a certain level," she notes. "Imagine the possibilities if you link that to a financial management tool."

The quest to profit from new revenue streams is something "every retail banker in the country is wrestling with," admits Coyne. She agrees that the priority for banks will not be figuring how to add new fees in place of older ones, but rather to "find things of value that the client is willing to pay for."

"Traditional revenue streams have dried up," Coyne acknowledges. "We are an industry that has painted ourselves into a 'free' corner. When revenue streams dried up and we had to charge for services that clients previously received for free, such as free checking, there was a perceived unfairness issue on the part of the client. But if we can build new tools that clients willingly agree to purchase, there is much more perceived value there."

According to Coyne, the value-based services bank customers will be willing to pay for will largely center around mobile, and to a lesser extent online, banking services. "Consumers have proven that they are very willing to download and pay for an app that they find useful," she says.

Coyne adds that most banks "have something on the drawing board" for new products designed for mobile smartphones or tablets. The key, she insists, isn't necessarily rolling out some never-before-seen innovative product per se, but rather offering the right product at the right time when the public is ready to adopt it -- such as mobile remote deposit capture (see related article, page 10). In some ways, Coyne says, it's better to be the bank that rolls out a refined version of a hot, cutting-edge new mobile technology than to be the bank that first introduces it to the market. "The 'fast follower' gets the benefit of seeing what the first organization did and doing it better," she explains.

Still, Coyne is quick to point out that traditional fees are not going to ride off completely into the sunset. She says banks will still impose certain fees, but that they will be targeted more at those consumers "who don't operate their accounts responsibly" or at customers who have a fragmented relationship with the bank.

"Some portion of fees will probably remain," Coyne says. "Banks will be very careful about proposing new fees in the future because they are perceived as a nuisance by consumers. But at some point you have to draw the line. We are a for-profit business -- we have shareholders we have to answer to -- and very few businesses offer everything for free."