The now famous Ally Bank commercial of 2012 that asked two kids if they want a pony goes down as one of the most effective in banking history. Two girls are asked if they want a pony, and while the girl in blue gets a toy pony, the girl in orange gets a real pony. Disappointment ensues to the Blue Kid and the moral, of course, is even kids know it’s wrong to treat others differently. While an effective commercial and a nice lesson for the grade school set, it is a poor lesson for bankers not to mention both intellectually and emotionally disingenuous.
Ally took a swipe at the banking establishment for weak disclosures and “bait-and-switch” products such as reward checking and tiered rates. While there is no doubt many banks can improve their disclosures and there were certainly some transgressions with misleading products, it was the exception rather than the rule. If anything, banking suffers from treating 90% of customers the same, despite the fact that each customer has different needs, values and sensitivities. Such is the basis for paper statements, as the Blue Kid-argument is being leveled against BankFinancial ($1.4B, IL) as the bank now charges $15 per month for paper statements.
Sorry About The Toy Pony
To put BankFinancial’s move in perspective, the Bank provides free checking but then levels a charge of $15 to have that “free” checking account issue paper statements. Detractors will note that the industry range is between free and $10 per month. Banks that do charge for statements have an average fee of about $2.60 per month. So what is BankFinancial thinking getting away with charging the highest in the industry and almost six times the average? What are the Blue Kid-supporters going to say about another example of banks ripping their customers off by charging exorbitant fees for basic services? The answer is that BankFinancial is thinking boldly and brilliantly. The reason is a potent lesson for all bankers as we move into the digital age.
Which Pony Do You Really Want?
Lost on the public is the fact that most banks don’t return their cost of capital. High costs are just one of our many problems of our industry and producing paper statements is an easy cost to reduce. This is especially true considering when more than 60% of recipients don’t even open them, paper statements drive the cost of accounts up, they are slow way to provide information, they are not environmentally friendly and given the choice, most customers would rather have an electronic statement anyway.
As an industry, we started dealing with this problem by moving to the point of indifference and charging customers that desire paper statements the cost of production using the logic that at least the bank is not being disadvantaged by the production of paper statements - If you want a real pony, then pay for a real pony. Charging on the margin, allows banks and customers to allocate resources efficiently. While a good solution, it is not the optimal solution and we needed BankFinancial to point this out.
Have Your Pony
The problem with covering marginal cost is that banks still need to cover the effective or total cost of producing paper statements. In other words, banks still needed to maintain the infrastructure/process to produce paper statements – a proposition that has its own cost. As the number of customers taking paper statements get reduced, the cost of maintaining that option to produce those statements increase. So while today’s current cost to produce a statement is about $2.40, tomorrow’s cost is over $10. BankFianancial, in some aspects, is just planning ahead.
The reality is that banks need to get out of the paper statement business. BankFinancial realized this and instead of just cutting off all its customers, it is now charging a high enough fee to dramatically shift their free accounts off paper statements. The high fee isn’t meant to turn paper statements into a profit center, but to strategically reduce the bank’s cost structure. The subtle message is - If you really want paper statements, then pay the $15 or move to a different bank.
Paper Statements Are But A Symbol
Banks need to restructure their processes in order to cut their operating cost in half to be competitive for the future. Loan production, account opening, physical facilities and more needs to be re-designed. The production of paper statements is just one clear example of a process banks are trying to hold on to for little logical reason other than tradition. Sure, if you poll your customers some are going to say they want statements just like the many customers that loved their travel agent. Every travel agent that would have surveyed their customers ten years ago would have found out that their remaining customers really want them to maintain the status quo. That is validating the customers you have, not architecting your business for the customers you want.
Platforms like Moven, Simple, Fidor Bank, PNC and many others are well beyond traditional banking. The sooner we reduce our cost as an industry and move more into the digital age the better. The reality is that the statement itself is archaic. Banks can build dashboards, alert systems, reconciliations and analytics to really help customers better manage their money in ways paper statements can’t. This can all be done in ways that not only make banking information more useful for customers, but reduce the cost for both the customer and the bank.
We are sure every kid wants a free pony until you bring their parents into the room and explain the ramifications of raising a pony. The Blue Kid, while disappointed, likely made out in the long run. Explain to customers the reasons to move off of paper statements and they will make out in the long run. BankFinancial is just ahead of its time.
Submitted by Chris Nichols on June 11, 2015