Growing Fee Revenues

7/31/2019 Growing Fee Revenues

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1May 2012

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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3May 2012

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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5May 2012

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

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Growing Fee Revenues