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Proposed law would make it easier to switch banks, but at what cost?

I occasionally cover topics related to the financial services industry because my primary employment serves financial institution clients. There is a proposed bill in Congress right now that caught my attention for several reasons: consumer advocacy, government regulation of the banking industry, and implications in the marketing technology space.

A brief recap.
The Freedom and Mobility in Consumer Banking Act, H.R. 3077, was introduced by Rep. Bradley Miller [D-NC13] on October 3, 2011.  The purpose of the act is to make it easier for consumers to close an account with one financial institution and move to another financial institution.  The legislation is supposed to increase competition between banks and provide consumers lower overall banking costs. Many consumer advocate groups support the proposed law.

As of the writing of this blog post the latest action on the bill was on October 21, 2011.  The bill  was referred to the Subcommittee on Financial Institutions and Consumer Credit.

The proposal in brief.
“To amend the Federal Deposit Insurance Act to ensure that customers have the right to immediately close any account at any insured depository institutions on demand, without cost to the consumer, that consumers receive any balance in their account immediately, and for other purposes.”

The Bottom line.

If enacted, the bill would:

  • Require financial institutions to close an account, when requested by the account holder,  at no charge at any time, regardless of account balance.
  • Prohibit financial institutions from charging additional fees for the closure.
  • Allow consumers at least 30 days to send payment for an account that is closed with a negative balance.
  • Prohibit financial institutions from reporting delinquent accounts that have a negative balance solely because of financial institution assessed fees.

So What does this all really mean?
We’ve learned recently that government trying to regulate bank fees with the consumer in mind only ends up hurting the consumer in other areas. Look at the effects of the Durbin amendment in the Dodd-Frank Act. Banks have dropped debit rewards programs, many experimented with fees on debit cards, and others are eliminating services that were previously free or increasing existing fees. Banks are a business and they exist to make money for their employees and shareholders. Trying to control the pricing of a business only forces them adjust pricing in other areas.  That’s just part of managing a business wisely.

I’m not saying that banks should justify all their fees because they need to make money. In fact I argue against that point in a post entitled a case for customer focus in the midst of financial regulation. What I am saying is that businesses should be able to price their services based on competition and market prices. Consumers have a choice and can vote with their wallet.

Back to our discussion on closing a bank account. Most financial institutions don’t charge a fee to close an account today. While this proposed legislation would aim to make sure that account closure fees are illegal, and thus not implemented in an attempt to keep customers from leaving,  I don’t think it’s necessary.  Two reasons for my opinion:

1. The court of public opinion convinced the larger financial institutions in the country to retract the debit card usage fees they had planned in response to the Durbin amendment. The internet and social media have changed how quickly consumers can become organized and allows them operate in large groups with a strong voice. Excessive account closure fees would go-over well with the public.

2. Switching banks is a hassle and isn’t something that can happen with a single phone call or mouse-click. To switch an account, the consumer would need to go through a checklist like this:

  • open a new account
  • move any direct deposits
  • change any automatic debits
  • order new checks
  • order a new debit card
  • request account closure from the existing bank

My point is, I don’t believe account closure fees are inhibiting customers from switching today and I don’t think banks would make this a sore spot for their public relations based on public opinion. The bill is trying to solve a problem that doesn’t exist. The FinancialBrand.com shares research that shows the reason most people switch banks is due to a change life circumstances, not poor banking service. That’s another reason that account closure fees would be unpopular.

The consumer needs to have some skin in the game also.
While the bill is aimed to help consumers, it should not relieve them of their responsibility for sound financial management. It also should not place a burden on financial institutions to recover money without being able to charge for such services. A section of the bill reads:

(3) NOTICE AND OPPORTUNITY FOR REPAYMENT OF OVERDRAFT- If an account of an accountholder at an insured depository institution has a negative balance at the time the account is closed, the insured depository institution– `(A) shall promptly notify the account holder of the fact of the negative balance and the amount due; and `(B) may, after the end of the 30-day period beginning on the date notice is provided to an account holder under subparagraph (A)– `(i) report the fact of the outstanding balance or any other adverse information with respect to such account to any consumer reporting agency, subject to the limitations in paragraph (2); and `(ii) take any other collection activity with respect to such outstanding balance.

Let’s be real. if a consumer requests to close an account with a negative balance then the financial institution should have a right to request the amount of the overage immediately before dismissing the account. Otherwise we are saying banks should be required to give free loans to consumers who don’t exercise financial discipline.

While there is stipulation about reporting the incident to a credit agency why should the financial institution have to wait 30 days in this situation? In that time, the customer may have opened an account with another financial institution.  This type of unfair consumer protection reduces the value of the risk score based systems which allow financial institutions to make informed decisions during account opening. They might find themselves floating another negative balance if the consumer decides to spend more than they have and switch accounts again.

A bank has the right to charge for services performed after an account is closed.
The bill also has language that concerns moving a direct deposit to the new financial institution.

Transfer of Direct Deposit Received After Notice of Closure and Payment- If– `(1) during the 30-day period beginning after any balance in an account at an insured depository institution that is closed by the institution pursuant to a request by the account holder has been repaid to the account holder, a previously scheduled amount intended for direct deposit into such account is received by such institution, and `(2) before the time such amount is received, the consumer provides the insured depository institution with an account number and insured depository institution routing number for a successor transaction or savings account at another insured depository institution, the insured depository institution which receives such amount shall transfer such amount, without a fee and by electronic fund transfer, to the insured depository institution identified by the former account holder for deposit in the transaction or savings account identified by such former account holder.

Again, let’s be reasonable. It should be the responsibility of the account holder to move all direct deposits and auto-debits to a new account before closing their existing account. If the financial institution with the closed account has to negotiate and transfer a deposit to another financial institution on a closed account then they should have the right to charge for that service.

Marketing Technology Implication Number One
If enacted, customers can close their account in-person or remotely through some electronic channel. So at a minimum, financial institutions would need to support account closure in their digital channels.  But this would really be a call for financial institutions to create customer focused conversations in those channels to gain feedback from the customer about why they are leaving and possibly making an attempt to retain their business.

Case in point. I recently closed an account with Wells Fargo when they announced they would implement a monthly fee to use the debit card. This is an account that I had held for 20 years. It was originally opened with First Union bank which was purchased by Wachovia bank. Wachovia was purchased in recent years by Wells Fargo. I closed the account through online banking by sending a secure message requesting account closure. I never spoke to a live person. No one from the bank ever contacted me about why I was leaving and no one attempted to retain my business. Within 24 hours of sending the request my account was closed.  A 20 year relationship ended just like that.

There is an opportunity here for banks and credit unions to interact with customers if they use a remote channel for account closure. I fully believe account holders should be able to close accounts through secure digital channels. But financial institutions owe it to themselves to get feedback during the process.

Marketing Technology Implication Number Two
Switching banks is a hassle because of all the work involved. A bank account isn’t like a monthly utility bill that we see once a month. It has hooks into it like direct deposit and bill payment.  This is part of the reason that bank switching services are getting more attention by some financial institutions.

The bank switching process is full of opportunities for financial institutions to learn and profile new account holders. There is exposure to elements of the customer’s life such as loan payments that might help the new financial institution with ways to serve the account holder in the future. The switching process does involve the consent of the customer to manage and move banking setup. It’s a great area for innovation and creation of new processes and procedures to bring customer service into focus.

So what’s your view of this proposed legislation?

Rethink rules that prohibit remote deposit

I love my credit union. I’ve been a member for many years and my relationship with them has steadily grown.  I use online banking for money transfer, bill pay, a personal finance manager (PFM), and even an integrated link to Turbo Tax. In return, my credit union gives me competitive rates on loans, better than average interest rates on share and draft accounts, great customer service, and no worries about nuisance fees.

Last year I opened a custodial share account for my daughter. She is the primary owner of the account but my name is on it until she reaches legal age. This account is not for her college education, rather it is her savings account for the money she earns. She can use it when and how she likes and that was the agreement when I took her to open the account. I want her to start managing how she spends her money.

Last week we experienced the first hiccup with her account. She received two checks for baby-sitting and wanted to deposit them. No problem I thought, we can deposit them through the remote capture service that is part of online banking. I use this feature frequently with my own accounts and have come to love the flexibility it gives me to make deposits after normal business hours.

Her share is allowed to access online banking.  But when we signed-in to send the check image I found that the feature was disabled for her account. That was disappointing to say the least, but I had another check to deposit into my own account so I decided I would deposit the two at a Credit Union service center the next day. (The nearest CU branch is 25 minutes away compared to five minutes to the nearest service center.)

When I tried to deposit the check into her account at the service center, the teller told me that she could not process the transaction because it was blocked (a second failed attempt to deposit funds). So I had to call my credit union from the service center to ask about the block. I guessed it had something to do with her age and I was right. What I didn’t expect was the reason.

The lady in Member Services told me that my daughter didn’t have a beacon score and thus she was not allowed to make remote deposits. However, after reviewing my status they lifted the block so that we would be allowed to make deposits for her from credit union service centers. I thanked her for this and then asked if she could do the same for the remote deposits via online banking. After placing me on hold for several minutes she came back on the line and told me that they could not lift this restriction because she did not have a beacon score. At this point I politely thanked her for researching my question and then completed my deposit at the service center.

On my way home I tried to think of a rational explanation as to why the credit union would enforce a rule prohibiting a deposit into an account.  The only thing I could think of was that it was a means to reduce the risk that someone would knowingly deposit a bad check.  But isn’t that what the two day hold on check deposits was to setup to achieve?

So I looked up “beacon score”.  Investopedia defines a beacon score as a “number generated by Equifax Credit Bureau to rank an individual’s credit-worthiness.” So in other words it’s the credit score to show how likely an individual is to repay a loan.  Beacon is the term used by Equifax and was replaced by the term Pinnacle in more recent years.

So back to my story and the reason for this blog post. It still doesn’t make sense to me why my daughter can’t remotely deposit money into her account. Justifying the policy on the basis of her credit score makes even less sense to me. This isn’t about a loan payment, a loan application, or a credit check. She just wants to put the money she earned into her bank account.

Remote deposit is a growing feature for account holders at financial institutions across the country.  I’ll admit the idea seemed risky when I first read about it years ago. But it’s a natural expansion of the Check 21 Act where financial institutions started using digital check images instead of mailing them to each other.  BankDirector.com listed remote deposit capture as one the top 10 technologies for banking in an article published last June. The BankDirector article also noted that industry leader USAA reported that members deposited more than 450,000 checks in the first five months of their mobile deposit capture product.

I’m trying to encourage my daughter to save her money and use a credit union. With the continued expansion of technology and capabilities her generation is sure to use physical branch locations less than my generation.  Restricting her from using remote deposit just doesn’t make good sense for her or the credit union. It’s time to remove this prohibitive policy and make remote deposit capture services available to all members.

UPDATE: A few days after posting this I received a call from the VP of Operations at my credit union. We discussed the basis for the business process described in this post. They gave my account and override to allow remote deposit. As I think about it now, I believe this kind of background check should be performed at new account opening (which it often is). If a person is worthy to have an account (based on risk score) then they should also be trusted enough to perform remote deposits.

Customer loyalty through debit card reward programs

Debit cards received significant attention in 2011 after the Durbin amendment in the Dodd-Frank Act set the maximum interchange fee for a single card transaction to 21 cents plus .05% of the purchase charge. Large banks responded by removing debit card rewards programs and introducing debit card usage fees.  The new fees were not popular with the public and the large banks soon reversed the fees due to customer complaints and a reduction in new account openings.

Then merchant-funded reward programsappeared as a derivation of the rewards program and resulting fees. In this program, a local merchant works with a bank or credit union to offer a discount/reward to the consumer for the merchant’s product or service. The amount of the discount and the time it is redeemable will vary. It’s a like a coupon that is later credited to the consumer’s account. The consumer sees the offer in their online banking interface and must accept or add the special reward to their account. When the consumer uses their debit card with the merchant it triggers the discount to be paid back into the account from which the debit is withdrawn.

Merchant Funded Rewards

A sample of some reward options that appeared to me this month

It works for financial institutions because it gives them a lower cost to service the debit rewards programs. Instead of funding a percentage reward on each transaction, the financial institution is only paying an agreed portion of the administrative overhead to manage the program. The Merchant pays the discount to the consumer and in some cases a referral fee back to the financial institution.

Merchants are able to target consumers in a specific customer segment and collect information about which segments are attracting the most customers. Of course they also win by selling extra goods and services. But with the marketing data they can collect will help them better target customers for future promotions. The Merchant reduces their financial risk because they only pay a referral back to the financial institution if the customer completes a transaction.

I brainstormed to think of some ideas for how the program administrators might tweak the program in the future to see if will gain greater usage and adoption by consumers. Here’s my list:

* Allow the customer to deposit their reward earnings to a savings/money market account. I think this is more of a psychological play for the FI than a practical win for the consumer. No one will get rich off of the debit transactions that they earn. But it’s favorable to promote healthy savings habits and this would be an easy way to throw a few extra dollars that way.

* Allow the customer to designate a charity to receive their reward earnings. The idea is to be able to pool customer rewards together for a more significant charitable contribution. It gives the customer a sense of working with their community (fellow account holders) to help a worthy cause. It’s also a good way to promote how the financial institution is supporting a local cause.

* Setup debit card usage tiers that earn discounts on other products and services from the financial institution. Examples include reduced closing costs on a mortgage, reduced loan rate, an increased rate on a CD, etc. The idea is to use the debit card program as a loyalty builder that provides leads to other products and services within the financial institution.

I see the program in action every week because my credit union is a participating financial institution in the program. I’m not a big debit card user but I like how the program is structured because it provides something for the consumer, merchant, and financial institution. That’s a  win-win-win for everyone.