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      Home » Checking, Fee Income, Product

      The Clash of Free Checking

      Submitted by on Wednesday, November 10, 20107 Comments

      Source: Getty Images

      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

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      • Phylliss said:

        How clever to use the Clash’s songs in this article! If anything, I was urged to read on just to see how the lyrics played out with the subject. Had to admit, I sang (in my head) as each lyric was presented. Great way to get us to read the article.

      • Andrew Vahrenkamp said:

        I hope your next article is on in-store branching (“Lost in the Supermarket”). Perhaps HR Management (“Career Opportunities”)? Indirect auto lending (“Brand New Cadillac”)? Security (“Bankrobber”)? The choices really are endless…

        We are sticking with free checking for now, but only because I’m certain we are not effectively cross-selling into our free checking base. In other words, once we improve our sales culture, we will find our free checking consumers to be profitable, even with reduced fee income opportunity.

      • Bill said:

        Did not see the option to vote “Unsure”.

        Then read Andrew Vahrenkamps comment. We are in the very same situation – “we are not effectively cross-selling into our free checking base”.

        Deepening our relationship penetration with our members will be critical.

      • CU Water Cooler » Blog Archive » CU Water Cooler 11/11 said:

        [...] • The Clash of Free Checking | The Raddon Report [...]

      • Tracy said:

        I recently switched from Webster Bank in CT to Rockville Bank. This was due to the documentation received in the mail regarding Webster’s minimum 10 ATM/DBT transactions per statement period. I don’t want fees on the money I earn. Rockville Bank’s customer service is superior. I was sent a personal handwritten note thanking me for my business and now when I go in the Bank or Drive-Thru they greet me by name and with a smile. Rockville ROCKS!

      • Mark Zmarzly said:

        Great article, Marcus! You’re absolutely right that we’ve conditioned consumers to want and expect free checking. Markets that are dominated by larger banks will see plenty of churn in the coming years because the larger banks are making product decisions based on their much larger number of accounts per branch.

        Community banks and CUs typically aren’t close to capacity in their branches. A little backwards math (working from BofA’s total amount of overdraft income in 2009) shows that they have more than 5,500 accounts per branch. The math on Wells Fargo shows more than 4,500. Your typical community branch has only 900-1,100 accounts per branch. Adding another 500 customers should be a marginal cost issue and not cost the large amounts quoted by full costing models. Community banks and CUs can’t afford to follow the lead of the big banks because the branch economics aren’t the same.

        I’ll note that I’m biased because our client base is aggressive in marketing free checking but the large amount of national data we analyze shows only a very, very small number of single-service free checking households compared to what everyone seems to be projecting. Haberfeld will offer a free webinar about the economics of free checking on dec 9th if anyone is interested.

        Again, great article! Glad to see you’re adding good thought-provoking ideas to the conversation and not just mimicking the negative sentiments.

      • Marcus Rothaar (author) said:

        Andrew – very impressive Clash song references! I must admit that I almost used “Bankrobber” in this article as well.

        I think the comment from you and Bill is spot on, active checking doesn’t automatically translate into deeper relationships, it still takes some work. I think Tracy’s comment supports this from the consumer perspective as well – I’d be willing to bet that her new institution is at the top of her list when she opens her next loan or deposit account.

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