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?


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