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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?

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.

A case for customer focus in the midst of financial regulation

 

Banks are reacting to loss of fee income by creating new fees and dropping services.

Financial institutions across the country are reacting to the impact of Regulation E changes and the Durbin Amendment to the Dodd-Frank Act. The Regulation E changes of 2010 prohibit financial institutions from charging consumers fees for overdrafts on ATM and debit card transactions unless the consumer consents to be charged a fee.  The Durbin Amendment states that interchange fees for debit card transactions must be “reasonable and proportionate” to the actual processing costs incurred by the issuer.  The proposed interchange fee cap is 12 cents per transaction, well below today’s average of 44 cents per transaction.

Many banks are reacting by making changes to fee structures, checking programs, and rewards programs. Chase,  Wells Fargo, and PNC have already announced that they will stop enrolling some customers in debit card reward programs.  Chase, PNC, and HSBC are among the banks experimenting with higher ATM fees and Bank of America is  testing revised fee structures for checking accounts in some markets.

The irony of “consumer protection legislation.”

So while the government is creating legislation with the banner to protect consumers, you have to ask yourself is it really working? What we are seeing is that banks are shifting fee structures in an effort to maintain that level of income.  It’s just forcing financial institutions to look elsewhere for profits. The banks after all are a business. They protect the interests of their stakeholders and employees by making a profit. So at the end of the day, the consumer is still paying fees and depending on how they structure their financial relationships and behaviors, they may pay more fees than before the recent regulation started.

With the newly developing  account fee structure, financial institutions will in-effect spread their fees  among more consumers. Maybe that was the idea in the first place. Instead of taking from the few to pay for the masses (free checking), banks will now take a little from everyone.

The hunt for the most profitable customers.

A side effect of the increased account fees is that many customers will close account that don’t meet the minimum requirements for no fees.  In the past, it didn’t cost the consumer anything to leave dormant accounts open. With new fee structures, consumers are likely to consolidate their accounts to one or two financial institutions.  So where is the most profitable customer? Is it the one that is prone to live outside the boundaries of the account programs such that they are paying regular monthly fees for service and overages?  Or is it with the customer that doesn’t pay any fees for account services but that may hold secondary accounts such as auto or home loans that pay interest? The financial institution surely values both types of account holders.

The real goal here should be to focus on value services not fees.

With all the attention and press on financial industry regulation and fees, have the banks lost site of what really drives profits in the first place? Is it possible that banks could replace lost fees by adding more value services rather than increasing existing or creating new fees? I have  to wonder.

An area that I think is ripe for this to happen is online banking. Many financial institutions have already started making the online banking control panel a portal to related financial services.  There’s money to be made in third-party integrations that provide value services to customers.  Financial institutions can create structures to keep part of the retail price paid by consumers for some services. Here are a few ideas:

  • Tax preparation software. I list this one because my credit union already provides an integration to Turbo Tax.  Launching Turbo Tax from within online baking, my name, address, and interest income are automatically transferred to the program.  The retail price to me is comparable to buying this product at a retail store.
  • Credit bureau services? Consumers can purchase credit reports, credit scores, and monitoring services directly from the credit bureaus. But it makes sense that your financial institution would facilitate this transaction as well.  When consumers think about their financial picture their financial provider ban be part of the equation.
  • Identity monitoring and protection services – These services are also offered directly by third parties.  But giving out personal information to a brand such as your financial institution is much easier for consumers to trust.
  • Personal to person payments – Today PayPal is the leader in this space.  I know there’s a huge push in the industry to define standards and leaders in mobile-to-mobile payments, but why not extend online bill pay to include more person-to-person payment options by integrating with a service such as PayPal?  The value to the customer is the ability to electronically send a payment to another person rather than having a check mailed from online bill pay.  It’s all about timing , ease of use, and faster accessibility to funds.  Consumers are already use to paying a fee for this service so financial institutions could leverage a part of the fee already in place as their part of being the “finder” for the transaction.

UPDATE: After I published this post, I found Serve from American Express. It’s another example of extending electronic payment options to consumers and a good candidate for online banking integrations.

    What’s your take? Can you think of other ways for financial institutions to increase income through value services and customer focus?