After the last recession, Dodd-Frank and the FDIC raised deposit fees which prompted many banks to start including an “FDIC Assessment Fee” in their deposit account charge. The FDIC issued guidance in 2012 that labeled the practice as misleading, so most of those banks just changed the name to a “Deposit Assessment Fee” and kept the practice. One full recovery, one drop in assessment rates by the FDIC and a tax reform change later, and many banks are still at the practice. This is a mistake for a number of reasons, and it is worth exploring as the argument to remove the assessment fee underscores some key tenants of deposit management. In this article, we highlight why passing on an assessment fee to customers is a self-defeating move and why now is the time to stop the practice.
In The Name of Customer Service
The biggest problem that passing on a deposit assessment fee causes is confusion for the customer. Some banks claim to offer “Drama Free Banking,” “Transparent Banking” or have similar mottos yet charge a deposit assessment fee detailed in the fine print. The implication here is that the bank is passing through a fee similar to a tax to the customer which isn’t exactly the case.
Banks don’t pass on other deposit or insurance costs to their customers so why break this fee out? The customer doesn’t control a bank’s regulatory CAMELS ratings for which the fee is based so why does it make sense to charge a fee to your depositor?
Banks should charge whatever they think they need to for a deposit account, but attempting to blame the FDIC or Dodd-Frank makes a bank seem slightly vindictive in a passive-aggressive sort of way. While banks might have felt they had to do this to survive back in 2011, given the current state of the economy and bank earnings, banks should consider removing the deposit assessment fee breakout in an effort to be more customer-centric.
In addition to the economy and increasing net interest margins, the competitive landscape supports doing away with the deposit assessment fee now. As can be seen below, the spread difference between the highest paying banks and the lowest paying banks is at one of the tightest on record. This means that there is little price differentiation between banks. However, this pricing difference is likely to change as deposit competition heats up. While banks have had few competitive deposit alternatives over the last ten years, this is now changing. Having a deposit assessment fee will potentially make more bank customer consider other alternatives.
Deposit Sensitivity Issues
Another reason to remove the fee is that it convolutes deposit sensitivity calculations. It is hard enough to calculate deposit elasticities taking into account fees and rates without a deposit assessment fee built into the equation. Our most relevant data for estimating beta during a rate rise came at a time from back in 2004 to 2006 when banks did not charge a deposit assessment fee. Thus, when forecasting sensitivities, it is important to have comparable data. Having this deposit assessment fee alters the comparison and makes projections potentially less accurate.
In a similar vein, having deposit assessment fees resident now could hurt the data integrity for the future. If there is one data set that you want as “clean” as possible, it is your balance and interest rate responsiveness data.
Improving margins and higher earnings are two good reasons to do away with your deposit assessment fees if you still charge them. Deposit beta is still low but set to increase each time the Fed moves the Fed Funds Target Rate. This allows an opportunity for banks to clean up their deposit fee structure and simplify pricing for the customer before it influences the data. Deposits will soon generate the bulk of a bank’s value, and it will be important to have the purest data and structure available to make the best pricing decisions. If you have not done so already, consider removing your deposit assessment fee.
Submitted by Chris Nichols on February 13, 2018