When was the last time you changed your fees? Most banks, when setting fees on bank products and services start and end by taking a look at what selected competitors are doing. This method, while not a bad start, will almost always result in a suboptimal setting of fees. The reason for this is not only is your bank very difficult to compare to your competition, but your competition is likely doing the same thing. In this article, we look at practical considerations for banks looking to set or revise their current fee structure.
The Complicated Nature of Fees and Banking
The reality is that all bank pricing should be part of a strategy to achieve a specific set of goals. Fees should be optimized to attract the greatest customers, with the longest terminal life that generates the most value. This equation is likely lost on most of your competition. Even if it is not, your competitors likely have different goals plus a variety of other different factors that make them the wrong bank to benchmark.
To make matters more complicated, banks, different than most industries, not only have to balance fees and service level, but also have to manage balances (deposits/loan) and interest rates to customers. This presents a multi-dimensional problem that takes some analysis and maybe some experimentation.
To help you set or revise fees, here are eight items to take into consideration:
What is your goal: Banks need to choose a single metric to optimize when setting deposit fees. Here are the most popular goals, all of which drive very different fee-setting strategies: fee income, cost of funds reduction, efficiency improvement, customer acquisition, cross-sell/share of wallet and customer satisfaction. Start your fee review effort with your end goal in mind and then consider adjusting your fee accordingly.
Fee Waiving Culture: Next, decide what you want your fee waiving culture to be. If you want to impose high fees, but waive it for your good customers, then you might expect a 50% fee exception target. On the other hand, some bank managers, particularly in this day and age, want to instill a culture of not waiving fees. For this group, fee exceptions are closer to 10%. If this is your bank, then consider higher earnings credit rates, lower balance requirements and lower general fees so that you can instill a culture of fee discipline across the organization.
Earnings Credit: Since earning credits offset fees, the structure of your analyzed accounts must be taken into consideration in order to best understand how fees will impact customers. Valuable customers with high balances and high transaction volume usually benefit the most from analyzed accounts. These customers should be broken out, reviewed and analyzed separately to determine if your fees and earnings credit strike the right combination.
Channel Consideration: This is our favorite missed topic. Decide what your position is on branches, limited service branches, kiosks, couriers, remote deposit capture and electronic channels in order to best play into your channel strategy. If you are trying to reduce the number of branches, then charges on items like remote deposit capture (“RDC”) and other branch alternatives should be kept low to provide the incentive to shift. Yes, the RDC machine and service may cost you something, but it is a whole lot cheaper than couriers, branches and teller interaction.
Performance Considerations: Understand that any time you change a monthly fee, transaction fee, earnings credit or balance requirement you change the convexity and duration of the deposit balance. More importantly, not only do you change the performance characteristics of the account but of the entire product and alternative products. Increase the fees on interest business checking and balances may increase, as money shifts out of other accounts to take advantage of the flexibility and interest rate. Conversely, raise the fees on incoming ACH wires, and you may find that balances drop as other banks or channels are utilized (like paper checks). With every fee or rate change, articulate what you think will happen and then see what does happen. Keep tracking this information, so you better understand how your deposits perform.
Human Capital: Similar to the analysis above, decide how much you value customer interaction versus labor costs. It may make little sense to have highly skilled account reps dealing with account research or extra statements when you can just pay the $25 per month cost to get the customer access to the information online. In the same vein, if you get frequent requested for archived statements that require manual work, it might make sense to just pay the cost of the extra storage for your customers and give them more than three months of back statements. That said, for certain products, you may want to incent customer interaction, and so low manual fees might be warranted for items like deposit correction.
Cost Considerations: While direct cost considerations shouldn’t be your main factor (the above factors may be more important), taking into account what your bank pays for related products and services should carry some weight. That said, don’t fall into the trap that just because your bank gets charged from a vendor that you have to charge the customer. Online bill pay is a classic example in that, if the service is utilized, it makes the deposit account less interest rate sensitive and increases the terminal value of the account. The investment of picking up the monthly charges is usually well worth it for a profitable account that utilizes the service.
Competition: Finally, do consider what the competition is doing as that will have an impact on performance, retention and customer acquisition. Placement of your fees should be within your pricing strategy and business model. If you are trying to be the low-cost leader with a low touch approach, then, by all means, drop fees lower than your competition. However, if your bank is really about high touch, personal service, then maybe it is worth positioning your fee structure towards the higher end of the competition. Before doing anything against the competition, have an understanding how the competition’s culture, cost structure, demographic composition, and goals may differ.
Understanding how changing fees are one of the hardest and most complicated endeavors in banking. Large banks have models that can optimize return given each account’s individual sensitivities. In future articles, we will explain how your bank can leverage data to set rates so that you can match the large banks and increases both balances and fee income. However, in the meantime, one of the best ways to start down this path is by experimenting with the changing of fees and charges in different markets and recording what happens. This is 180 degrees from just pricing against the competition only.
Submitted by Chris Nichols on February 11, 2019