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Striking the Right Balance: Free vs. Fee Account Strategy
Presentation by:
Todd N. WernerGVP, Business Development and Marketing
June 2011
Industry Update
Average member/customer profitability down at most financial institutions following crisisGlobally, average member profitability declined 5% to 15% since the crisis
Efforts by financial institutions to restore member profitability face hurdles59% reported decreased member loyalty63% say members more price sensitive 63% say members are ‘shopping around’ more frequentlyGreater willingness to move away from ‘poor’ service
Traditional profit recovery strategies – rate and fee increases, conventional cross-selling and organic growth – will not readily fix the problem. Many will struggle
Members have broader expectationsService demands have increased
– High-value services,– Relevant offerings, and – High-usage delivery channels
June 2010 Accenture study across 35 retail banking institutions
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Legislation and regulation continue to be game changing.
We expect more regulation in the financial services sector in the near future.
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Legal and regulatory developments promise to have a significant impact on financial services
CARD Act: ‘Reasonable’ penalty fees definedFee limit set at $25 (cannot exceed dollar amount of violation)
• Average penalty fee is $391
Bans inactivity fees, multiple penalty fees for single violationIssuers must reevaluate interest rate increases since Jan. 2009 and reduce rate if appropriate
Regulation E: NSF/Overdraft feesFinancial institutions must obtain consumers’ affirmative consent in order to assess overdraft fees for one-time debit and ATM transactionsBanks made preparations to comply
Durbin Amendment (part of Dodd-Frank Act): InterchangeImplementing in late JulyRequires debit interchange fees be proportional to cost; Prohibits debit exclusivity arrangements and routing restrictions; Limits restrictions on offering discounts for forms of payment; Limits restrictions on transaction minimums and maximums (credit only)
1Pew Safe Credit Cards Project, qtd. in 6/15/10, “Fed limits card fees to $25, CNNMoney.com
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How many of youcan afford to offer FREE checking?
1 Billion1 Billion1 Billion
3 Billion3 Billion3 Billion
5 Billion5 Billion5 Billion
9 Billion9 Billion9 Billion
7 Billion7 Billion7 Billion
11 Billion11 Billion11 Billion13 Billion13 Billion13 Billion
Reg E
Durbin Amendment ?
NextLegislation. . .
How many of your members will pay a fee for an account with NO perks?5
Income Source Amount
Overdraft Income $150
Debit Interchange $36
Interest Spread $25
Other Income (Checks/Add Ons)
$7
Total $218
Subtract Expenses:
StatementsChecksBranch NetworksSystems
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$150
$218
$188
$168
--$30$30Opt-In
--$20$20Interchange
--$18$18Future Regs
How do you
replace $68
of annual revenue? ($5.66/mo)
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Conclusion
Credit Unions need to “de-commoditize” their accounts by delivering products that build stronger relationships
between their members and their institutions
Credit Unions are looking for strategies and programs that provide high value to members and help substantiate fee-
based checking accounts
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Polling question 1
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Revenue pressures from legal and regulatory developments are exacerbated by ongoing consumer behavior trends.
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With consumer confidence shaken, members expect more from their financial institutions.
39%Don’t want all of their accounts
in one place because they don’t trust financial
companies.*
94%Believe trust is somewhat or
very important in choosing a FI.
80%Plan to permanently increase
the amount of money they save.*
64%Want to learn more about managing their finances.**
*Members with $100K+ household income
**Members age 18-24
Source: 5/10, “Seven Predictions for the Future of Banking,” Mintel Comperemedia (webinar)
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Community banks rank notably better in the eyes of consumers
Source:
BAI research report—”Navigating in Turbulent Times—Competing for Deposits and Relationships”
(1Q 2010)
CategoryLarge banks Community banks
Easy to do business 53% 81%
A bank I trust 48% 78%
Friendly 51% 80%
Responsive staff 46% 74%
Quick problem resolution 41% 70%
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Things that FIs do to build trust
Put members in the right productDeliver incremental value in accounts with feesBe committed to solving a problemBe informedFee waiversIn business: know my businessSimple, Easy, Fast, Friendly
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What All of This Means
Many national “brands” have disappeared – a few more could also falter.
The winners will be those employing distinctive strategies and tactics that cost-effectively target, attract, and capture profitable deposit members.
New products and differentiated acquisition strategies and tactics are essential.
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How are you handling…
Current account structure?
The cost of free checking?
Number of members who opted-in?
Increased branch operation costs?
Personal performance pressures?
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Polling question 2
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A member engaging account design that allows FIs to provide increased value within their DDA accounts, enhance the member relationship, drive profitable behaviors and deliver incremental fee income.
The Decision
Increased member
acquisition
Increased member
acquisition
Deeper & more
profitable member
relationship s (increased
LTV)
Deeper & more
profitable member
relationship s (increased
LTV)
Improved Member
Satisfaction
Improved Member
Satisfaction
Greater tenured member
relationships
Greater tenured member
relationships
Heightened frequency of member interaction
Heightened frequency of member interaction
Reduced operating expenses
Reduced operating expenses
Member Checking
Whether your choice is:1. To keep Free Checking, or…2. To eliminate/grandfather Free Checking,
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Back to Basics
Embedded accounts that marry financial and non-financial products and services
Development of overlay strategies to compliment core account
Fee checking accounts that are value behavior based with the ability to “earn down” the monthly fee
Full or Partial conversion
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Polling question 3
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Consumer Insights
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Marketplace Needs
Can you give me discounts on the things I buy everyday?
Can you provide our family with access to insurance alternatives?
I want to simplify my banking relationships.
Where can I get access to good benefits at a reasonable price?
Will you give me tools to protect my identity?
I want to maximize non-interest income in a way members will respond to positively
I want to migrate from free-checking to fee-based services.
I want to increase the longevity of my member relationships.
I want my members to have more products with my institution.
I want to acquire more members and more deposits.
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BenefitsThe opportunity to provide
services and features members want while also meeting CU needs
Members are looking for “free” checking
and are willing to change their behaviors to keep it!
Provides better value in the checking/share draft account
Acquisition members are a 1/3 more likely to open an account if money saving and fraud protection were offered with their account
Member Retention & Referral Consumers are 60% more likely to refer/recommend their FI if they were offered money-saving benefits such as Everywhere Cash Savings or Everyday Rebate Rewards
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Consumers are willing to
maintain certain behaviors
to keep their account free
% Definitely/Very Likely To Do In Order To Keep Free Checking…
Responses Based on a 5 Point Scale –Top2 Box = Definitely Likely/Very Likely
Consumers Willing To Accept Change
Likely behavior acceptance to keep free checking
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%%
%%
%%
%%
%%
%%
%%
%%
%%
%%
Likely to Switch or Open an Account with…
Responses Based on a 5 Point Scale –Top2 Box = Definitely Would Switch/Open and Likely Would Switch/Open
Addition of Relevant Benefits Drives Acquisition
(Compared to 2010 Research)
1.5x
1.3x
1.4x
1.5x
1.6x
1.5x
1.4x
1.1x
1.1x
N/A
Individual Appeal
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Top Three Categories of Interest
ID Fraud
Benefits
Savings
Benefits
Credit Management
Benefits
*Function of (% Def/VL to Switch) x (Mean Score Rating) – Perfect Score = 500 (100% D/VL x 5.0 Mean Score)
Consumer Interest Index*
Consumers continue to want/expect certain benefits from their financial institution
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Discrete Choice Conjoint Analysis determined best “3-benefit” bundle
Nearly 1/3 of U.S. adults would select
this bundle if offered as part of
checking account
Everywhere Cash SavingsSM
Everyday Rebate Rewards
Payment Card Protection
Best “3-Benefit” Bundle
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Discrete Choice Conjoint Analysis determined best “5-benefit” bundle
Over 1/3 of U.S. adults would select this
bundle if offered as part of checking
account
Everywhere Cash SavingsSM
Everyday Rebate Rewards
Payment Card Protection
Daily Credit Monitoring
Credit Reports and Scores
Best “5-Benefit” Bundle
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Five of the best value‐added benefits
bundled with the best two financial
benefits
will realize the highest consumer acceptance level nationwide
44%
of U.S. adults would select the account above and pay a monthly
fee if
offered those account features
Discrete Choice Conjoint Analysis determined the best optimal bundle
Optimal Account Design
Acceptance
Everywhere Cash SavingsSM
Everyday Rebate Rewards
Payment Card Protection
Daily Credit Monitoring
Credit Reports and Scores
Bill Pay or Direct Deposit
Online Banking
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Value‐added Benefits Deliver Increased Revenue Potential
Value‐added benefits deliver 63%
more revenue
than a flat monthly
fee. Plus the optimal account
design encourages cost savings by
offering benefits with discount
coupons, cash back and rebates. It
also provides Identity Theft
protection benefits
Benefits Increase Revenue Potential
Benefits Bundle Includes:•
Everywhere Cash SavingsSM
•
Everyday Rebate Rewards•
Payment Card Protection•
Daily Credit Monitoring•
Credit Reports and Scores
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• Members are willing to pay for value, but increased fees must equal increased value
• Members are accepting of certain behaviors in order to keep their account free
• Members prefer fees they can control
• Introduction of fees does not equal increased attritionOn average, FIs could expect ~13%* attrition when changing the core account structure; primarily driven by closing shell accounts
• It is essential to understand which combination of services drives purchase interest and satisfaction
Research Summary
*Attrition rate varies based on brand affinity to the institution. Attrition rate is a combination of: normal account attrition, FI closed the account (shell or unprofitable account), consumer closed the account or converted to another account
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Sample Fee-Based Program Options
Examples where the account has a nominal monthly fee, which is defined by the Institution
Everywhere Cash Savings – with
mobile coupon delivery
Internet Monitoring of
Credit/Debit Cards
Purchase Protection/Extended
Warranty
Free Debit Card
Free Mobile Banking
Discounted Safety Deposit Box
“Value Plus Checking”“Value Plus Checking”
Daily Credit Monitoring
Identity Theft Insurance
Identity Fraud Support Service
Free Debit Card
Free Mobile Banking
Free Online Banking/Bill Pay
Foreign ATM Fee Waivers
“Secure Checking”“Secure Checking”
Companion Airfare
Concierge Service
Elite Travel Services
Free Mobile Banking
Preferred Rates on CDs
Wealth Management Services
Personal Financial Management
“Established Checking”“Established Checking”
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Illustrative Program: Fee-Based
NEW Value-Added Non-Financial Benefits:
Everywhere Cash SavingsSM
Internet Credit/Debit Card Monitoring
Identity Fraud Support Service
Extended Warranty
Purchase Price Protection
Plus the Core Bank Benefits:
Free Checks / Debit Card
Free Safety Deposit Box
Free Online Banking and Bill Pay
Free Cashiers & Travelers Checks and
Free Notary Services
New Core Account Design New Core Account Design
Monthly Fee for Core Checking Account is $4‐7/mo
“X” number of debit transactions/month
Minimum daily balance requirement
Enroll in online banking
Enroll in direct deposit
Enroll in eStatements
Enroll in online bill pay
Monthly Account
Requirements
Monthly Account
Requirements
member Receives Statement Credit
Based on Monthly Behavior
member Receives Statement Credit
Based on Monthly Behavior
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Members have the opportunity to earn down their monthly fee by exhibiting these value based behaviors that are convenient for them and cost effective for you:
Driv
e Po
sitiv
eBehavior Change
Maintaining a minimum daily balance of $X
Having “X” signature- based transactions
Enrolling in online banking
Going paperless with electronic statements
Enrolling in online bill pay
Signing up for direct deposit
Simple Member Behavior Changes = Highly Engaged Members = Increased Retention & Profitability 33
Sample Account Behavior Scenarios
Maintaining a minimum daily balance of $100
$0.25 credit for every debit card swipe
Enrolling in online banking
Going paperless with electronic statements
Enrolling in online bill pay
Signing up for direct deposit
Scenario A: $6.00 monthly account fee, must meet all 5 account qualifiers, then all debit transactions are rewarded with a $0.25/swipe credit
Example Outcomes• 24 debit transactions = Full $6.00 credit to account
(member paid nothing!)• 15 debit transactions = $3.75 credit to account
Minimum of 15 debit card transactions
Going paperless with electronic statements
Enrolling in online bill pay
Signing up for direct deposit
Scenario B: $8.00 monthly account fee, must meet all 4 account qualifiers and entire monthly fee is credited
= qualifier behaviors = buy down behaviors34
More Sample Scenarios
Maintaining a minimum daily balance of $100
$0.50 credit for every debit card swipe OVER
$10
Going paperless with electronic statements
Signing up for direct deposit
Scenario C: $8.00 monthly account fee, must meet all 3 account qualifiers, then all debit transactions OVER $10 are rewarded with a $0.50/swipe credit
Example Outcomes• 17 total debit transactions for the month, but only 8 of
those were over $10 = $4.00 credit to account• 15 total debit transactions for the month, but only 3 of
those were over $10 = $1.50 credit to account
Going paperless with electronic statements
Enrolling in online bill pay
Signing up for direct deposit
Scenario D: $7.00 monthly account fee, must meet all 4 account qualifiers and fee is reduced to $3.95 (partial reward vs. full fee waiver)
Maintaining a minimum daily balance of $250
= qualifier behaviors = buy down behaviors35
Case Studies
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Fee Account, with Affinion Benefits
Average Balance
Lifetime ValueTenure
3 years $600 - $900
$480 per year
1.7x longer
Up to 2.5x
higher2.3x
higher
Free Checking
Average difference between free checking account and an enhanced, fee-based checking account with Affinion benefits
In addition to extensive revenue to our clients, Affinion services deliver increased tenure, deposits and overall lifetime value
Real Value to the Bottom Line
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BENEFIT CONFIGURATIONCredit reports and scores
Credit monitoring
Credit information hotline
Internet Surveillance
Identity Theft Insurance
Identity Fraud Support Service
Credit Card Registration
Lost / stolen assistance
BENEFIT CONFIGURATIONCredit reports and scores
Credit monitoring
Credit information hotline
Internet Surveillance
Identity Theft Insurance
Identity Fraud Support Service
Credit Card Registration
Lost / stolen assistance
Identity Theft Solution Generates Incremental Income; Addresses Bank’s Movement away from free checking; Adds more value in the core account
– Partner currently has over 310,000 customers in the identity theft program– Bank will generate $10 Million in net new revenue in 2011– Bank cross-sells 29%+ of all new accounts into the identity theft program– Bank was rated #1 Overall FI Solution for Assisting Customers in Resolving Identity Fraud (Javelin)– Ranked #2 Overall Best-in-Class Identity Protection Solution for FIs (Javelin)
Case Study: White Label
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Credit Union Success Story – Fee Income / Acquisition
Need:
To develop a brand new checking account designed to create a competitive advantage, drive non-interest income, and attract new members/accounts - all while providing a valuable product that members want and can design themselves.
Solution:Create 6 different “Packages” ranging from credit and identity theft services to travel and shopping discounts and services.
Let members design their own account by choosing the package(s) they want, for a nominal fee, to add to their account.
Leverage CU’s strong sales culture as an opportunity to maximize revenue and program penetration.
Western CU • $620 Million in Assets• Branches 20• Members 56,000
Business Result:
20% cross-sale ratio in the first two months (account launched in April)
Nearly 20% of all new checking accounts have at least one value-added package (year-end goal 50%)
Program is trending 100 brand new checking accounts / week
“Credit Package” as been the most chosen of all package options
National media exposure: Forbes, Yahoo Finance, CNBC
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Credit Union Success Story – Incremental Fee Income and Protection for Members
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Client Need:Concerned about the ongoing threat of identity theft and wanted a comprehensive solution to offer to members.
Find alternative methods for incremental revenue by generating a predictable, recurring fee income stream.
Solution: Create a comprehensive, robust identity theft solution designed to proactive mitigate fraud risk for members. Also provide personalized resolution and insurance to members in the unlikely event fraud does occur.
Offer the solution in multiple distribution channels; in- branch, online and via direct mail, so members can interact with the product in their preferred communication channels.
Give members the opportunity to try the product at no charge for 30 days and then just $9.95/mo
Business Result:• Credit Union launched the program with
an initial direct mail campaign to 128,927 members
• Initial mailing achieved a 1.84% response rate, equating to approximately $151,000+ in annual incremental revenue for the Credit Union
• Follow-up mailing was sent to 106,809 members achieving a 1.03% response rate
• Approximate current monthly revenue to the Credit Union based on all channels is $21,000/mo = $252,000+ in annual incremental revenue for the Credit Union
Credit Union in SE• $1.9B in assets• 205,000 members
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Credit Union Success Story – Upgrading Benefits
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Client Need:Value added checking strategy since 2001 and program was strong but growth slowed in 2008.
Leveraging member/.consumer insights on our CheckMax checking account program and recommended changing the benefits and upgrading to newer benefits
Solution:In August 2009 we launched the revamped checking account program utilizing our “Best Practices” including newer benefits, training, incentives, goal setting.
Business Result: • Since launch 30% growth rate in the
program to date
• Currently:• 1882 enrolled in CheckMax/CheckMax
Plus Account• 19% penetration rate
Client - Credit Union in Midwest• 10K Checking Accounts• 19,000 members
Re-designing accounts and acquiring profitable members can…
Deeper and more profitable member relationships (Increased ROI and LTV)
Heightened frequency of member interaction
Reduced operating expenses
Generate incremental fee income
Increased member acquisition
Improved member satisfaction
Greater tenured member relationships
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