The Clash of Free Checking
Free Checking must find it easy to relate to the British punk rock band The Clash. Right from Free Checking’s inception, it identified with the desperate plea of “I needed money ‘cause I had none” in the band’s cover of “I Fought the Law.”
Free Checking’s response was to generate non-interest income in the form of overdraft fees and debit card interchange income to subsidize its freeness. All was right with the world and everybody was happy (or at least the 70 percent of consumers who never overdrew their checking accounts). Then along came the next line of that song, “I fought the law, and the law won.” And boy, did it ever. From Reg. E opt-in requirements to the Durbinization of the Dodd-Frank Act, lawmakers and regulators started to squeeze the non-interest income tighter than Joe Strummer’s pants.
Which leads us to the latest Clash song on Free Checking’s soundtrack, “Should I Stay or Should I Go”? Many financial institutions find themselves faced with that decision as they plot their checking growth strategies for 2011 and beyond.
If I go there will be trouble
The fear in shifting away from free checking, of course, is that customers will walk out the door. What reasonable consumer would want to suddenly pay for something that they’ve become accustomed to getting for free? This fear is not completely unfounded, as consumers repeatedly tell us that they really, really like their free checking accounts (to use a technical research term). In RFG’s latest round of national consumer surveys, we asked consumers to indicate what factors might cause them to switch to another financial institution. The number one reason cited by consumers was a change in free checking. Forget about deposit rates, loan rates, NSF fees, online banking, ATM or branch locations. Consumers indicated that they don’t care about those things nearly as much as they value their free checking accounts. More precisely, 39 percent of consumers indicated that they would switch financial institutions if you messed with their free checking. Granted, it is one thing to check a box on a survey and an entirely different thing to actually move an account, but the results clearly show the value that consumers place on free checking. In this era of consumerism and anti-bank sentiment, it may be a risky endeavor to test their fortitude.
But the nation’s biggest banks have done just that. Chase, Bank of America, Wells Fargo and Citi have all eliminated truly free checking accounts. The catch is that each still offers consumers a way to get to “free.” Whether it is through relationship- or channel-based activity, consumers are able to avoid service fees and retain their highly coveted free checking by giving the institution something in return. Requirements such as direct deposit, a minimum number of monthly debit card transactions or combined balance minimums are often easy for many consumers to meet. But this ease does not make them any less important to the depository institution in terms of ensuring that the checking account remains active, sticky and primary. In many respects, these requirements simply serve as an insurance policy for the institution to protect against the account becoming dormant.
And if I stay it will be double
Financial institutions that elect to retain their free checking product may find themselves at a competitive advantage over their counterparts. A certain segment of the checking population will continue to gravitate towards a no-strings-attached free checking account if given the choice, even if the strings on the alternative are practically invisible. In terms of product importance to the financial institution, you don’t get any more important than an active checking account. RFG’s consumer surveys consistently show that active checking is a key indicator of garnering the elusive “primary financial institution” status. PFI is critical to the institution in terms of the cross-sale opportunities it represents. In other words, more often than not, you get first crack at future business from a PFI customer.
The inherent risk in sticking with free is attracting consumers who are unwilling to return your generosity. As has always been the case, some consumers will just cherry-pick you for the free checking, but have no intention of bringing any other business to the institution, or incur enough fees to cover the institution’s maintenance and servicing expenses on the account. In the good old days (last year), these types of accounts were subsidized by accounts that generated significant interest income (high balances) or non-interest income (debit card interchange income and/or NSF fees). Since the non-interest income side of the model has been altered by recent legislation, free checking becomes a true loss leader product in the current environment. Institutions that stick with free will need to be even more aggressive with relationship-building to offset the expense burden.
So you gotta let me know, should I stay or should I go?
Regardless of which path your institution heads down, it’s clear that checking strategies will need to continue to evolve in response to regulatory influence and consumer preferences. As the Consumer Financial Protection Bureau begins to form, the threat of future regulations that further hinder non-interest income remain an imminent possibility. So just when you have it all figured out, the model gets shaken again and forces you to reevaluate the lyrics from a British punk rock song released in the early ‘80s.
What's your institution's plan for free checking?
- Keep offering free checking (67%, 253 Votes)
- Don't offer it and don't plan to (4%, 16 Votes)
- Moving away from free checking (29%, 110 Votes)
Total Voters: 379