If the Federal Reserve does make a change in their target Fed Funds and Reserve rate on Thursday it will have many banks scrambling to take another look at their rates on deposits and their own asset-liability positions as it pertains to how fast their loans will reset (given floors, fixed rates, etc.). Unfortunately, few banks will stop to look at their fee structure on their deposit accounts. Considering that deposit fees can compose 70% of a bank’s fee income, this could be a mistake, especially because fee income streams are also interest rate sensitive. A Fed move will increase the headlines in the media and start both a psychological and behavioral shift in the mindset of the retail and commercial bank customer. While we have focused extensively on how rising interest rates will impact lending, today we focus on some trends and potential behavior of deposit fees.
To do this, we use a tool from Market Rate Insights called Fee Builder. This allows us to survey 1,700+ institutions in the U.S. in order to deduce averages, trends and anomalies when it comes to deposit-related products. While every bank needs to set their fees according to their own pricing strategy and elasticities, this doesn’t happen in a vacuum. Customer response to rate, fee and minimum balance requirements are heavily influenced by competition and market changes. In fact, external changes can influence volume sensitivities by 50% or more in a fast changing market. Banks that don’t stay on top of fee and rate changes will find themselves losing customers with little hope of getting them back. This why that we continually have stressed building a brand and transitioning customers into relationship and duration protected products in order to dampen the competitive effect.
Banks that have not invested in their brand and account structures now run the risk of losing deposit balances to other institutions. Last week, we saw our first 2.25% checking account offer which we have not seen in more than seven years. While banks will soon start to raise rates, they will do so slowly. This will force customers to look at other attributes such as fees. Unfortunately, for banks, survey after survey shows customers, particularly Millennials hate fees. For example, a recent Consumer Banking Insights Study from Harris showed that 31% of respondents hated bank’s monthly charge followed by ATM fees.
Let’s take the retail checking account. National trends are interesting and merit a comparison to your bank because following these trends may not be the best strategy. The overall theme for this year (below) has been to increase fees, strongly drop checking minimum balance requirements but increase combination balances. The net result has been an increase in non-interest income AND larger deposit balances. This has taken place against the backdrop of less fee waivers, which has also contributed to higher levels of fee income.
Going forward, banks need to be crystal clear on what they want to accomplish. Do you want to increase balances, duration, convexity, earnings or fee income? Decreasing minimum checking balances while increasing combined balance levels usually serve to increase liability duration driving up a bank’s net cost. Banks can get away with this in a falling rate environment, but that tactic is likely to be relatively expensive in a rising rate environment and funds shift out of non-interest bearing accounts.
While general fees are outlined below, there are some niche fees that bankers should be aware of. Notably, the average overdraft (OD) fee now stands at $31.51 for banks with overdraft protect at $6.60 per month. Both these figures are up an in line with recent trends. What is not shown in the numbers is the fact that more banks are instituting daily maximums. Ally bank, for instance, caused a stir when they raised their OD fee from an ultra-low $9 per item to $25 starting today. However, they are capping their overdraft charge of once per day.
The other important fee that customers are sensitive to in addition to the average monthly fee and overdraft are ATM fees. ATM fees that banks charge their own customers for using out-of-network machines has remained constant at about $1.10 and most banks allow an average of 4.4 free transactions.
Source: Market Rate Insights, Fee Builder
Competitive Anomalies Highlighting Strategic Advantages (and Disadvantages)
One thing that Fee Builder does extremely well is to highlight anomalies that banks might want to pay attention to in order to help with pricing positioning. Oddly, there is now little difference between bank and credit union deposit pricing and balance requirements (above). This wasn’t the case during the last rate increase where banks lost market share to many credit unions. Banks are now better positioned for that direct competition.
That said, banks are in a much worst position against direct, internet-only based banks. Take domestic wire charges for example. Banks with traditional branch structures charge an average of $11 per wire whereas direct banks charge $2.7. Not only does this impact fee sensitivities, but most traditional banks have not electronically enabled their wire production while most direct banks have. As a result, most community banks lose money on wires while most large banks and direct banks make money. This will further result in competitive pressure on community banks.
The more impactful anomaly is when it comes to balance requirements. As can be seen below, direct banks have lower minimum and minimum average balance requirements. Consider that monthly service charges are approximately 16% lower at direct banks compared to traditional banks. That is a fairly large competitive disadvantage that most banks will have to cope with. As labor, real estate and operational cost rise with economic growth, balances will continue to shift to banks with efficient operational structures as they will be more competitive on rate, fees and requirements.
Source: Market Rate Insights, Fee Builder
The deposit market is on the verge of becoming more dynamic. Rising rates will once again shift depositor’s attention to structures, rates and associated fees. Banks will face new competition from non-bank platforms as well as the resurgence of money market mutual funds. As customers relook at where they keep their liquidity fees and balance requirements, deposit charges will become more market driven. As such, if your bank only reviews fees once per year, you could find yourself already suffering an outflow of customers by the time you get around to adjusting your fees or offering a new structure. It pays to keep track of fee and rate trends and have a plan in place before rates start to move and you end of lagging the market by a considerable period of time. Get educated now and your bank will be in an offensive position when it counts.
Submitted by Chris Nichols on September 15, 2015