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."
Like Coyne, Doug Brown, SVP of mobile solutions for Jacksonville, Fla.-based banking and payments technology vendor FIS, believes mobile is a big part of the future revenue mix for banks. "A lot of big banks are making a transition from the old business model of fees to a new one," he says. "Mobile phones and tablets offer a lot of potential to reach clients in new and better ways."
Mobile wallets, which use NFC-based technology to allow customers to make contactless payments at the point of sale, already have begun to make their presence felt. Mountain View, Calif.-based Google launched a digital wallet this past fall. The search giant has agreements with Visa, MasterCard, American Express and Discover to make the Google Wallet available to the card companies' account holders, and there already are some NFC-enabled terminals in use across the U.S. that can accept it, including at many mass transit stations. Meanwhile, Isis, the mobile payments venture formed by AT&T Mobility, T-Mobile USA and Verizon Wireless, is set to launch this summer in select U.S. markets.
Brown believes mobile wallets can help banks replace traditional revenue streams in a number of ways. First, with consumers using their phones, rather than debit cards, to purchase products at the point of sale, it helps reduce reliance on what has now become a less-profitable payments method for banks due to the new Durbin interchange rules. "That can replace a lot of the lost interchange revenue," says Brown.
Also, adds Brown, the digital credentials used in a mobile wallet can help banks drive value for their customers at the point of sale, such as with expanded loyalty programs and location-based offerings, by partnering with local merchants. "It gives banks control of the customer experience," Brown says. "They can do merchant-funded rewards, but also there is opportunity for additional bank services, such as a microline of credit that might be needed at the time a customer is buying something. Banks are seeing now that consumers will happily pay for convenience." Meanwhile, he suggests, banks can leverage their "enormous advantage" in consumer trust versus companies that now offer similar services, such as Groupon and Living Social.
Brown admits that mobile wallets still need to gain widespread acceptance for such programs to be profitable for banks, but he believes that will happen sooner than many may think. One big obstacle for large-scale adoption of mobile wallets is that merchants need to install NFC-enabled terminals. But there are ways around that, Brown notes. He says FIS has created a mobile wallet offering that is cloud-based and can read QR codes printed off of a receipt, thus bypassing the need for NFC terminals. "We're still probably two to three years out before we see significant penetration [of mobile wallets in the U.S.], but I think it will happen, considering smartphone penetration is over 50 percent in the U.S. now."
Gaurav Dhall, global head of enterprise mobility and mobile devices for Wipro, a global IT services and consulting company headquartered in Bangalore, India, says mobile also can be used to set up new revenue streams for banks beyond the retail consumer space. For example, Dhall says, banks are offering their bigger clients wealth management services and programs on tablet computers, which are highly interactive and content-rich devices. "That can help keep the client sticky and sell them more services," he adds. Banks also can leverage the online channel in a similar way, Dhall notes, by providing services such as portfolio management.
Already, banks are beginning to utilize mobile in practices such as lending, adds Shushankar Daspal, the practice head for banking channels at Wipro. Lending products, he says, "are reasonably profitable products, and they help establish a long-term relationship with customers." According to Daspal, some banks are starting to look at how tablets can be used to aid in the mortgage process -- for example, by providing tools to help prospective homebuyers compare house prices in a certain area, or by giving them to mortgage loan originators who can use the tablets to follow up on additional requirements and request credit results.
End of the Branch as We Know It
As mobile continues its rise, meanwhile, most industry insiders agree that a reduction in branches — or at least a reinvention of the branch — will be necessary for banks to improve profitability. Celent's Narter believes branches will continue to have their place, but will act as more of a "sales and service center" rather than as a place to conduct a basic transaction, such as depositing a check. (For more on the transformation of the branch model, see related article, page 22.)
"Branch visits per account are going down," Narter reports. "There is an increase in envelope-less ATMs, which people are much more comfortable depositing checks into. And mobile RDC has also sucked traffic out of the branch."
Narter sees the redesigned, sales and service-focused branch of the future as featuring "smart" ATMs in the front of the store and trained staff on hand to assist customers who need help using them. He also predicts that to save money on staffing, banks will utilize "remote experts" -- each branch location may not have a mortgage expert on site, but a customer interested in finding out more information about mortgage products will be able to speak to one via videoconference.
Bob Meara, a senior analyst with Celent, adds that while U.S. banks are over-branched as an industry, there are viable branch strategies, depending on the size and culture of the bank. Credit unions and community banks, for example, still rely on the branch as a major channel and driver of new account openings. For bigger banks, Meara says, there will be an increase of in-store branches, not just in traditional locations like grocery stores, but also in department stores and other retail outlets where banks do not generally have a presence now.
Ultimately, though, Meara believes there will be a decline in the number of future branches. "In the next five years we'll see quite a significant contraction in the number of branches," he asserts. "It wasn't very long ago that banks trumpeted their extraordinary branch footprint as the reason why they will succeed; now they regard them as hugely expensive."
Whatever changes may occur, it's clear that rapidly emerging technology, intensifying regulatory scrutiny and evolving consumer preferences will change the way banks do business in the future. "It is an industry that is reinventing itself, so it is pretty exciting from that aspect," says KeyBank's Coyne. "There is a lot of opportunity."
Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio