growing fee revenues
TRANSCRIPT
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by Hank Israel
As early ee revenue tactics reach their limits, banks must start now in developing
customer-riendly innovations that will bear ruit over the next ew years.
Growing Fee Revenuesin a Challenging Market
In the challenging era that has unolded since checking-re-
lated ee revenues were slashed by new laws and regulations,
retail banks have searched or any immediate possibility to
regain revenue altitude. Responses have ranged rom bold
pricing changes eliciting national attention to suocating new
ee schedules stued with dozens o entries.
But as this initial round o new ees has run its course, con-
usion and even atalism has crept in, with banks trapped in
a cycle o hit-and-miss experimentation. Given the estimated
industry revenue shortall o $18 billion to $20 billion annu-
ally just rom the reduction in debit interchange and checking
overdrat ees, the pressure or recovery is tremendous.In setting the agenda or the remainder o 2012 and next
year, it is time to recast the quest or transaction revenues
in terms o customer-oriented innovation. This is the point
where the development teams ideally should be mocking up
a variety o potential new initiatives and working with senior
management to chart a multi-year course.
The continuing goal is to build transaction revenues in a
way that rewards customers, encourages ecient channel
usage, captures air returns or valuable services, and sets
a sustainable oundation or growth. It is a tall order, to be
sure, with many complexities in dealing with customer senti-
ment and the new regulatory environment. Yet necessity is
the mother o invention here. In considering how to get paid
or providing transaction accounts, banks need to incorpo-
rate the customers perspective.
Looking AheAd
As banks look beyond this year to 2013 and 2014, we see
at least three main types o ee-building and -substitution
initiatives that need to be started now in order to bear ruit
by then. These include campaigns to increase debit and
credit card transaction volume; nancing innovations that
will help households to meet spending contingencies; and
new service propositions centered on prestige and special-
ized value.
ic. The Feds action on signature debit inter-
change will have a lasting impact on the card business but
shouldnt be viewed as a closing o the book. There still is
an interchange stream o revenues to be nurtured and pos-
sibilities to improve adoption and usage patterns among
regional banking customers. The bottom line or the debit
card is that even at a sharply lowered average o 26 centso interchange revenue per transaction, it still is a valuable
component o the retail DDA account.
The traditional constituency o the debit card includes
customers who preer to electronically spend rom their
deposit accounts and avoid credit card usage, and people
who like card convenience but simply do not have access to
credit cards. While these categories o transaction growth
are slowing as the market becomes saturated, a resh wave
o customer demand is building as the debit card is pro-
moted as a nancial planning tool. As championed by mass
market nancial planners such as Suze Orman and Dave
Ramsey, debit appeals to the myriad households that con-
tinue to deleverage and tighten monthly spending.
Regional banks have historically been kicked out o the
credit card business. But given their powerul potential o
better credit underwriting based on a relationship play, we
believe that regional banks will increasingly re-enter that
market. Banks that issue credit cards can jump on the band-
wagon o household cash management by promoting the
credit card as a dual-purpose vehicle that provides a liquidity
Asseeninthe
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Growing Fee Revenues in a Challenging Market
buer when needed and also provides tools to track and
control spending (Figure 1).
In ollowing through on card transaction opportunities,
one challenge that banks will ace is coaxing customers into
switching their card usage patterns. Historically, wallet posi-tion or a credit card has been driven by the size o credit
line, rewards and/or brand. Few regional banks can com-
pete with national card brands or the elaborate rewards pro-
grams that the mainline issues have in place. What regional
banks can do is compete on credit line (with better credit)
and the integration o card products into the customers over-
all cash management solution. Overall, it appears that rela-
tionship credit and improved household cash management
oerings currently are the strongest banking industry hook to
encourage credit and debit card usage.
lqudy vs. There are gaps in the products
oered by banks or managing liquidity, spelling opportunity
or innovators. Indeed, there are sound credit line opportuni-ties linked to the payment account that the home equity prod-
uct cant support or credit worthy customers with little to no
equity in their homes, or instance, or without homes at all.
There is also a big product gap between the de acto
lending provided by overdrat coverage and the spending
power o the credit card. While only a portion o the total
mass market is qualied or a credit card, a large swath
o consumers would qualiy or a three, ve or two week
Fu 1: avus o Bud F rvus
Card usage and unsecured lending will play especially important rolesin addressing the current fee revenue crisis.
Dscpo/exmps
Drive improved adoption and utilization o credit and debit
cards, urther eroding cash and charge cards.
Develop propositions on unsecured lines to capture balances
outside the bank e.g., unsecured lending, responsible
deposit advance programs, and structured installments or thecredit wary.
Develop value-added propositions or customers around
prestige and add-on services, including:
Concierge / Platinum Card
Travel, dental, purchase, and ID thet, etc
Increase behavioral requirements or relationship requirements
on transaction accounts, or raise maintenance ees.
Increase ees or transactions that represent conveniences, or
example: ATMs, Wire Transers, Stop Payments and ReturnedItems.
Charge or premium service channels that do not provide
sales or relationship benet to the customer, or example
paper statements and Envelop- less ATM/ or mobile check
deposit.
Po
hs
h
Average
Low
Low
Low
tm
1836 Months
1836 Months
1836 Months
1 Month
1 Month
1 Month
Cos
Cd Us & ic
Cd Bcs
Ps/Vu-ddd
tms & Codos
expdd Svcs
C Pc
Source: Novantas, LLC
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advance based on household cash fows. Banks need to pro-
vide a continuum o credit products that match customer cash
fow patterns.
The goal or the bank is to build substitute revenues by meet-
ing household liquidity needs in innovative ways. Novantas
research reveals that short-term credit oers can be tailored
across three dimensions to meet the broadest customer sets:
accss. From automatic coverage (traditional overdrat
protection) to manual request (deposit advance-like pro-
grams), each customer group has its own preerences or
accessing credit, both when and how. Banks that oer onlyone option wont reach the ull market, whereas those that
study various segment preerences and respond accordingly
will have the best result. Also the total pool o potential cus-
tomers can be expanded as providers move rom traditional
revolving credit programs to per-incident arrangements that
are tied to various kinds o transactions, such as bill pay.
Pyoff. Our research has detected a broad range o situ-
ational pay-o preerences or short term liquidity. For Oops
I missed transactions, or example, automatically paying o
balances is preerred or many. By contrast, the preerence
or Im away, cover it transactions is a manual payment
or a transer at the customers direction. Interestingly, a thirdliquidity needs group preers installment credit. Here the cus-
tomer orientation includes Im behind and need to make
an emergency purchase, and I want structure when I incur
debt. Developing liquidity programs that address the cus-
tomers pay-o intent maximizes consumer acceptance and
trust; doing it simply and elegantly maximizes utilization.
Pc. Most institutions ocus on prevailing rates and
transer ees in setting credit prices, but they ignore the cus-
tomer perception o value in the particular circumstances
when credit is extended. Consumers generally expect to pay
less or pre-arranged longer-term programs, or example,
and more or contingency liquidity. By developing liquidity
solutions around customer preerences, banks can reach a
wider range o credit users and grow revenues.
Challenges to this type o progress include developing a
mechanism or low-cost underwriting; developing sel-service
mechanisms; communicating a simple message to credit-
wary customers who dont want to get in over their heads;
and balancing the requirements o the new regulatory envi-
ronment with the need or revenue replacement.
Ps/vu. A nal source o transaction revenues is to
charge premiums or unctional value and/or prestige. Here
the opportunity revolves around propositions that solve par-
ticular needs and/or provide an aura o prestige or recogni-
tion. While the market potential is smaller in scale, we have
seen successul rms reach as much as 10% o their transac-
tion base with the right combinations o oers, including:
Coc/pum svcs. In this scenario, the bank
develops (or brands) a service center that provides prestige
services to customers. Examples include special event ticket
purchases; special lines o personal service; and insuranceresolution services or auto and health claims, etc. (e.g.
American Express Platinum Card).
Suo suc poms. Examples in this cat-
egory include travel (health and trip protection); dental
packages; purchase protection or debit and credit cards;
account/ID thet insurance; and reerrals to lower cost pro-
viders o health care.
ecd fomo d svcs. Possibilities
include programs to market small business services to cus-
tomers in the micro-market; mobile apps that help customers
track warranties and proo o purchase; and nancial coach-
ing services that remind customers to take insurance photos,shop auto insurance, track investments, etc.
Taken alone, each possibility will appeal only to a seg-
ment o customers, and that is why eective banks will build
a broad shel o programs and utilize all customer commu-
nication channels to appropriately position oers. One plus
is that the inexpensive Internet and mobile channels provide
many opportunities or interactivity, as well as geo-location
unctionality that acilitates customer-relevant oers (The chal-
lenge is ensuring that the bank matches the cost o marketing
to the value o the programs. It is also important to avoid
overwhelming the customer with either irrelevant or repeti-
tious oers that impede the customer experience).
Short-term optionS
While no banker relishes the prospect o raising ees in
the current environment, the current nancial realities may
require that they do so. There are a ew options that will help
while a bank waits on longer term cost and revenue growth
strategies come to ruition. We see three classes (in descend-
ing preerence) o opportunities.
Convenience sells itself in many instances. With the right marketing and a bit of orientation,
people often willingly adapt self-service technologies, as in the successful rollout of self-service
booking and ticketing in the airline industry.
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Growing Fee Revenues in a Challenging Market
1) Bvos/osp. Many banks have experi-
mented with various types o account usage terms or ree
checking. Examples include monthly minimums or debit
transaction minimums and checking balances. In another
vein, uller relationships can be encouraged by adding suc-cessive eatures as deposit and loan balances grow.
In exploring the possibilities, one consideration is that
higher deposit and transaction requirements may discour-
age households that are shopping or new deposit products,
impacting the rate o new customer acquisition.
Finally, there is a risk that raising deposit balance mini-
mums may actually reduce protability in the current environ-
ment, given that ew banks are growing their loan porto-
lios. However, eective banks may be able to leverage the
strategy to substitute rate-sensitive balances with lower cost
balances rom transaction relationships.
2) Covc cs. Possibilities include higherees or established conveniences such as automated teller
machine usage, and or inrequently used situational prod-
ucts including wire transers, stop payments and returned
deposit item ees. While not strategic, such tactics can gener-
ate incremental returns i not overdone.
In considering the options, one important actor is antici-
pating public perceptions. In the current environment, con-
sumer groups and media are ocusing on these types o ees.
Also, convenience ees have less overall revenue potential
compared with other options, even with extreme pricing.Along with other actors, the bank needs to examine whether
a potential ee initiative oers a material return.
3) C pc. Here the bank begins to dierentiate
pricing or deposits and withdrawals based on the cost o
transactions. Banks have been undamentally backwards on
this topic, in that many provide ree check-clearing and ATM
services, while charging or person-to-person (P2P) transers
or electronic payments, and mobile deposits.
Bankers should examine the long-term picture, and under-
stand the value o converting paper statements, check writing
and ATM services while incenting basic electronic services
that support cost reduction. Interestingly, there is also inelas-ticity in certain segments around manual transactions they
are willing to pay or it.
One challenge is that the opportunity to cleanly reduce
or eliminate a certain type o channel delivery cost is limited
so long as even basic levels o transaction volume persist.
While many new programs will provide positive customer expe-
riences, ee increases generally have consequences. Out o ear o
these consequences, bankers oten make compromises that either
undermine the impact o the initiative, or orce the bank to make
more ee increases than necessary. In other cases, bankers do not
objectively evaluate their ability to levy the ee in the rst place,
oten resulting in ailure.
Competitive positioning Hanging back is better. We have
ound that unless a bank is going to be materially the lowest (by a
long shot), being the highest, or nearly the highest, or in the mid-
dle, makes little dierence. I the bank is using third-party market
data to choose a position, it should consider pricing near or at the
top o market, unless it appears the ee-based activity in question
is actively shopped by customers, in which case choose the bottom
position and market the dierence.
Anticipating behavior change I I make a smaller ee
change than what is seen in the market, my customers will not
decrease their usage. We have observed bank ee revisions that
did not cover the subsequent reduction in utilization meaning
that because o a compromise in the amount o the price change
the bank actually lost money. Beore acting, the bank should
understand the minimum ee increase that will cover the expected
behavior change compromises can do damage.
Cumulative impact It will only impact 2% o the customers
5% annually. Banks generally make ee changes by line o busi-
ness and rarely look at the cumulative impact on any one customer.
It is important to consider the customer point o view, manage ee
changes across the entire retail portolio and understand the com-
bined impact o all ee changes on any one customer or group. Tis
is the only reliable way to avoid unanticipated compound impacts
on protable customer segments.
Fee Schedule Small items wont matter. Some banks tend to
add numerous little tolls to their ee schedules over time. Based
eedback rom ocus groups, however, lengthy and complicated ee
schedules send the wrong message to customers, who think the
bank is trying to nickel and dime them. We have observed ee
schedules or consumer accounts in excess o three pages. I the
bank ranks the revenue generated rom each ee, how much comes
rom the bottom 80% o ees? Could the same revenue be generated
by making a slightly larger ee increase on a material line item?
Course corrections We should quickly pull back i the
market reacts. Many ee changes initially result in attrition or
Avoiding the Pitfalls
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Meanwhile, the xed cost o operations is spread over dimin-
ishing volumes o manual transactions, meaning that per-
transaction economics actually degrade. Also, banks are not
uniormly moving towards the reduction o paper, as there are
ancillary activities, such as providing paper checks, whichare benecial. Overall, these opportunities do not represent
large short-term income and likely turn on the reduction o
cost over time.
key QueStionS
Driving revenue growth rom current products is possibly the
most dreaded aspect o retail product management. Planning
ahead and working on longer term revenue growth strategies
will minimize the banks reliance on ee increases.
As senior management considers the possibilities, key
questions include:
How do my customers preer to compensate me orproducts and services?
How much time do I have? Do I need the revenue in
2012, 2013, or beyond?
How will this aect my products, services and uture
growth potential?
What is the potential cumulative impact o all o near-
term revenue initiatives on the customer base, and
what do these initiatives represent in terms o revenue
contribution, both now and in the uture?
Unortunately in the current environment, ee increasesmay be necessary in order or many rms to survive and
continue to serve customers independently. Yet there are
many ways to ampliy the value o oerings and mitigate
the market impact o changes in prices, terms and condi-
tions. Ultimately, customers who value the banks distinctive
service most oten will accept rate and ee increases when
explained transparently.
Hank Israel is a Partner in the New York office of Novantas LLC, a
management consultancy.
customer service calls, but later succeed.
We have observed banks that have reversed ee change deci-
sions based on anecdotal impacts in the contact center, which
initially may receive a food o calls. Upon closer inspection,
however, it is typically ound that among the small percentage o
customers impacted by the ee, less than 1% actually called. But as
a percentage o call center volume this represented a bulk o the
calls ater the ee change.
Secondly, most ee changes take 60 to 90 days to season, dur-
ing which time behavior change and attrition stabilizes and the
vocal minority ocuses on a new issue. We have observed institu-
tions removing the ee in the second or third month ollowing an
increase. Tis makes no sense they experience the early downside
o the ee change but do not reap the longer term benet, and actu-
ally reduce their income to a lower level than beore the change.
While there are reputational and regulatory reasons to reverse
course, most market over-reactions refect either poor preparation
or ee changes or a management gamble on market acceptance.
A better approach is to develop metrics or incremental revenues
versus usage potential diminishment and customer deection, and
budget the impact to the organization. Only when the impact
grossly exceeds expectations or the market trend shits radically
should the bank consider reversing course.
Market maker vs. lightening rod We move at our own pace.
Various banks have both over- and under-estimated how their
market position would support a ee change. In 2009, or example,
one small regional bank replaced its ree checking product with a
fat ee checking product. None o the competitors ollowed suite
and the bank lost share. Tis bank lacked the market scale to be a
rst mover in raising a ee.
Elsewhere, a nationally recognized bank attempted to intro-
duce a monthly transaction ee, which had been successully
adopted elsewhere by two regional banks. But in this case, the size
and brand o the bank attracted public scrutiny to the ee change,
and negative publicity led to its removal.
Te upshot is that when a bank is evaluating potential ee
income adjustments, it should consider how market position will
impact the ability to realize the revenue.
Hank Israel