ABA Professional Development

Free Checking: Ideas Don’t Replace Insights

Mark Zmarzly,ACTON Marketing – markz@actonfs.com

Why is free checking still a viable strategy?

• Banks are making economic decisions, but this is an emotional issue to your customers.

• Consumers don’t want a “fair value exchange,” they want justice!

• The economic models of a community bank are very different than those of a “big bank.” • You can’t afford to follow their product changes

and expect to acquire and retain customers.• Checking is still the key product to acquire and own

the retail household.

3

What the big banks are saying…

“We don’t want to raise fees on our customers but unfortunately, regulation is forcing us to do it. And as a result, some customers may end up unbanked.”

—Chase Representative

Another Chase rep two weeks later:

“Chase's move is a result of changes in competition, regulation, and customer behavior.”

As Big Banks Raise Fees, You Have Options — Your Money - NYTimes.com. Jan 14, 2011

sfgate.com. Banks are making free checking tougher to get. Jan 27, 2011

What the big banks are saying…

"Customers will have a choice," Bank of America Chief Accounting Officer Neil Cotty told analysts, of "bringing more relationships to us or paying a maintenance fee."

June of 2009 – My Access went from $5.95 to $8.95

May of 2011 – My Access set to change to $12

By 2012 – New “essentials” account will have a monthly fee that can’t be avoided.

Online.wsj.com. End Is Seen to Free Checking. June16, 2010

Product is a logical decision for the bank…

…but this is an emotional issue for your customer

• People are deeply rooted in the concept of fairness and will go to great lengths to defend it…even if it has negative consequences.

6

$10 split experiment

• What’s fair?

• A pair of strangers get to split $10.• They are separated and cannot talk or otherwise

communicate to negotiate a solution.• Person 1 presents a split proposal.• Person 2 gets to accept or reject the proposal.• If Person 2 accepts, both collect their shares.• If Person 2 rejects, both walk away with zero.• Game is played only once, people won’t meet

after.

$10 split experiment (cont.)

• So what happened?

• The majority of the time, person 1 presented a 50-50 split and it was accepted.

• But what happened when person 1 gave themselves more than $5?

• Predictably, person 2 felt indignant• BUT…was the indignation enough for them

to reject the offer and thus walk away with nothing?

8

$10 split experiment (cont.)

• I’m going to punish you…and myself

• When presented with an uneven split – whether $6 to $4 or $9 to $1 – person 2 rejects the offer the vast majority of the time.

• Logically, it’s better to have $1, $2, $3, or $4 than to receive $0, i.e. some $ is better than no $

• Emotionally, we would rather walk away empty handed but feel that justice has been served.

• More studies reveal that amount of $ wasn’t important…fairness and justice still triumphed.

What does this mean to our industry?

• We play this game when we try to acquire

• We are playing it with prospects (no history) and current customers (history).

• Other FIs are also playing it: offers vary wildly• Who can afford to let the customer walk away?

• MOST IMPORTANTLY: The underlying factor in weighing fairness is that the process, not the outcome, is the biggest factor.

It’s the process, not the outcome

• In the game, if a computer determines the split, people accept most any offer. But, procedural justice dictates that people need to be fair.

• Consumers know regulations started a change, but people decided to make the product change.

• Consumers are anchored – their frame of reference – is what they have known…typically “free.”• 85% of consumers surveyed say they do not expect to pay

fees for a checking account. • This was a one percent rise over the February 2010 index

and shows consistent consumer attitude that checking should remain free.

Jan 2011 BAI  & Finacle  Index of Bank Sentiment

Your customers still look for and expect free

AMI Research 2010

comScore 2010 Bankrate.com 2011 Study

The big banks are playing the $10 split game

Only the customer expected and was used to getting $5+

VS.

In the customer’s mind

• Here’s a $5 to $5 or better deal

I get:• Free Checking• Free Bill Pay• Free Debit Card• Etc.

I give you:• My $, regardless of

balance

“My money” is an emotional issue…fairness is, too.

In the customer’s mind

• Big Banks are taking more than they give and blaming it on regulatory changes!

I get:• “Basic or Value Checking”• Which includes the same

features as before

I give:• More of my $ to meet min

balance req.• Or, more relationships.

• Or, I give you a monthly payment of $9-$12.

Their “fair play” banking approach

“The best checking account in the Midwest, if not the country.”

• Free Checking with free 24-hour Grace Period on Overdrafts & ID resolution services.

• “Consumers are looking for simplicity, fairness, value, and transparency. Asterisk-Free Checking delivers all four.” Huntington Press Release – May 9, 2011  

Their “fair play” banking approach

• They are even using your words against you: We’re “breaking away from a typical approach to banking…, in fact, according to a recent ABA survey, 81% of banks plan to increase checking account maintenance fees…and 66% will abolish free checking altogether.”

• Oh, and they are outspending you:• Huntington spent 51% more last quarter on marketing• Grew by more than 67,000 new households – over 100 per

branch, per quarter.• Raised revenue from consumer checking by 9%

“The best checking account in the Midwest, if not the country.”

Banks’ Ad-Spending Dilemma Pits Cost-Cutting Against Revenue Needs. American Banker. May 17, 2011

Huntington Press Release – May 9, 2011  

Which split will the customer choose?

Which split would you choose?

Why is fairness important?

19

• “Customers who choose to stay with their current primary bank for additional products are most driven by positive past experience and perceptions that their bank is more focused on customers than on profits.” -- Rockwell Clancy, VP/financial services at J.D. Power & Associates

J.D. Power Top Performers have good “splits”

The focus of big banks: replacing lost revenue

• As fee income was pinched, large institutions focused on a different economic model…

• “Large institutions typically spend $300 to $350 a year to provide a checking account, including paying for branches, automated-teller machines, online account access and customer service by phone.”

– Michael Moebs, Moebs Service

• But, these fees are more common for higher transaction banks: the big 10 process 60% of all transactions in the U.S.

• PewTrusts.org

Can we make product changes like a big bank?

• Full Absorption Model, i.e. Optimizing Profit

Profitable Unprofitable

Tota

l Pro

fits

Break Even

< Ranked from Most to Least Profitable >

More on the differences in economic models

Operating model

Averagedeposits per branch ($000)

Average # of checking accounts per branch

Deposit Growth2009-2010

Credit unions 20,287 1,100 - 3,000 5.6%Community Banks 40,117 800 - 1,300 4.6%Super-community 41,539 1,200 - 1,800 2.0%Regional 45,770 2,100 - 3,200 1.6%Super-regional 50,232 2,300 - 4,100 1.0%National 70,508 3,700 - 5,900 1.2%

But 3 to 4 Xmore customers

Only 25-75% more deposits

Bancography & ACTON data

Get to capacity first!

• Other industries understand…

We want to maximize profits, not optimize

• Contribution Model, i.e. Maximizing Profit

# of Accounts

T

ota

l Pro

fits

TREND LINE

This is the core of a successful retail model

• Vernon Hill & Commerce Bank

  

“Vernon Hill is the best damn banker alive (just ask him).” - Sept 2010 Fortune

"Hill recognized that the economies of scale, and the big money, lay not in mergers but in the branches themselves. Here's how the math worked.

Hill reckoned that a suburban branch with $30 million in deposits earned a modest $500,000 a year. That's a 5% margin, or about $1.5 million, less $1 million in expenses. But as deposits grew, costs barely budged, while profits exploded.

By the early 2000s the average Commerce branch was approaching $100 million in deposits. An increase from $30 million to $100 million meant a sevenfold jump in profits, to around $3.7 million.”

This is the core of a successful retail model

• Vernon Hill & Commerce Bank

  

“Vernon Hill is the best damn banker alive (just ask him).” - Sept 2010 Fortune

“…as deposits grew, costs barely budged, while profits exploded…sevenfold!”

Branch Deposits

5% Margin Expenses Profits

$30 Million $1.5 Million $1.0 Million $500K

$100 Million $5.0 Million $1.3 Million $3.7 Million

We are focused on the wrong things!

• The importance of the core checking acct

• Core deposits won’t reprice in tandem with the coming change in market rates

• 86% of consumers cite the location of primary acct as the greatest reason they consider their bank a PFI

• We can’t replace the lost revenues with cost cutting or increased maintenance fees:

• Our industry would have to close over 50,000 branches to offset lost revenue. That’s half the industry total.

• Can’t increase fees – it would take a 1,500% hike in maintenance fees.

• Instead, figure out your incremental costs for servicing an account…then make your brick and mortar work harder for you!

$10 split experiment revisited

Consumers will decide• Accept a negative product

change: a lower offer• Accept no product change or a

neutral product change: an even split

• Go to a competing FI that is offering a better split.

• BUT…you control your product offerings and, ultimately, the customer’s choice.

?

ABA Professional Development

Mark Zmarzly,ACTON Marketing – markz@actonfs.com