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 continues to be leveled against banks that charge above $5 per paper statement.
Sorry About The Toy Pony
To put these statement fees in perspective, banks like Bank of America, Chase, US Bank, Capital One, Wells Fargo, BBVA Compass, Citibank, Regions, Fifth Third all charge $5 or more per statement. Meanwhile, the average community bank charges nothing and those that do have an average fee of about $2.60 per month. This is clearly another reason to move an account to a community bank, right? What are some of these large banks thinking of getting away with charging more than twice the average? The Blue Kid-supporters are, of course, going to say that this is another example of these large banks ripping their customers off by charging exorbitant fees for basic services? The answer is that most of these large banks are looking at the data. The reason is a potent lesson for all bankers as we evolve further 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 the many problems in 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 a slow way to provide information, they are not environmentally friendly, less secure 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 need to take note of the $7 paper statement as it will become the norm.
Have Your Pony
The problem with covering the 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 gets reduced, the cost of maintaining that option to produce those statements increases. So while today’s current cost to produce a statement is about $2.81, to include the cost of paper, machines, processing, postage, and management, this incremental cost continues to increase each year as it was $2.40, three years ago. As the number of paper statements decreases, the lower volume gets spread over the same cost base increasing the incremental cost to produce the statement. The economics get even worse in a low rate environment where the yield curve is also flat. In part because of paper statements, many banks now face some of the tightest margins in recorded history.
But wait you say, there is some marketing value to free or low-cost paper statements! You could advertise it and attract more customers. That is true but it would also be the worst idea going. The end result is not only would you lose more money, but you would attract customers that like the high cost of traditional banking. Community banks can pat themselves on the back all they want for not charging fees like the big banks, but the reality is mispriced paper statements can help sow a bank's demise. The more you market this attribute, the higher the probability of your demise. If community banking is to continue to be a force of good in our communities, we must remain financially strong in order to compete.
The reality is that banks need to get out of the paper statement business. Large banks realize this and instead of just cutting off their customers, they charge a high enough fee to dramatically shift their low-fee 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.
Please don't gloss over that point as it is critical to pricing theory in modern banking - when it comes to pricing some products (branches are the other obvious example) banks need to not only recoup their cost of capital but also move into a strategic position to remove the cost altogether. Banks that have low statement cost, are doing the exact opposite - they are adding relatively more customers to a product that, like the travel agent of 2012, has a limited future. The subtle message is - If you really want paper statements, then pay the $7 or move to a different bank. Customers self-select and Bank of America ends up with a more profitable customer base.
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 redesigned. 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 loved their travel agent. Every travel agent that would have surveyed their customers fifteen years ago, they 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 Bank of America, Chase, Capital One, PNC, and many others are well beyond traditional banking. The sooner we reduce our cost as an industry and move further 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 help customers better manage their money in ways paper statements can’t. If banks took the exact same money they spend on paper statements and reinvested it in creating/purchasing a mobile financial dashboard, everyone would be better off. This can all be done in ways that not only make account 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.
Submitted by Chris Nichols on June 14, 2020