Are Your Accounts Too Cheap?

By Chris Nichols

Starting last December, several large banks (Capital One, Discover, etc.) have started to raise rates. As of the first quarter, community banks have not followed suit but interestingly they have done something almost as expensive—they have decreased fees. As can be seen below, after several quarters of increasing fees, the first quarter of this year saw a decrease in service charges generated from deposit accounts. The result has been negligible as balances are increasing more because of behavioral economics than fee elasticity. Below, we will explore the details in order to give your bank an edge in setting fees.

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What is going on?

To get the data, we analyzed the spectrum of deposit data from MarketRates Insight’s Fee Builder tool called the Trenspotter report to help figure out what is going on. What we find is that monthly service charges are decreasing for almost every sized bank. Where the average bank charged approximately $8.42 per month in December, they are now down to $7.92.  Banks below $100mm in total assets have been the fastest to drop rates and they have done so the most. Banks over $10B have also been quick and aggressive to drop fees.

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In addition, balances to open accounts have dropped by some 15% since December and the minimum balance to avoid service charges was approximately $2,519 in December and is now down to $2,284, a drop of 9% in one quarter. Average balances to waive fees have dropped by 6.6% and minimum combined balances to waive fees are down about 1% as well.

All this adds up to lower per account fees and fewer accounts paying fees. This, of course, means less revenue at a time when banks are facing near-record low net interest margins. More importantly, with more than half the banks making below their cost of capital, every dollar to the bottom line helps.

The real question is why are banks doing this?

The answer is – we have no idea. We have looked at this all different ways and find this borderline irrational. Our only conclusion is that banks are not looking at the data.

Consider that in most markets the fee elasticity is negative. That is, banks that have not lowered their fees and are still getting balances. The average bank that did not raise their fee saw their deposits grow at about 2.3% for the quarter. This compares to the average bank that did raise their fee saw their deposits up 2.1%. We would not read too much into the actual numbers as the difference is within a statistical margin of error and possibly nothing more than noise, but the takeaway here is that, these days, customers are not that fee sensitive.

Higher wages and income are combining with lower energy prices to result in a 0.3% in disposable income according to the Bureau of Economic Analysis. Less competition from money market mutual funds, volatile equities and other crosswinds are resulting in more money coming into banks. This is behavioral, not economic.

Putting it into action.

As long as you are not drastic, you can raise fees, lower fees or leave fees the same and you are still going to get more deposits. If you are not, it is a marketing/value problem, not a fee problem. Before you drop your monthly service charges or lower your minimum levels, I would ask yourself what you hope to accomplish. If you are streamlining and harmonizing your product line up, fine, but if you are doing it to influence balances we would test that thesis out first. If you are in some oddball market that just happens to be fee sensitive (there are several in the US), we would test it with a branch and see how depositors react. Chances are you will have more luck rolling out a creative marketing promotion than lowering fees (or raising rates for that matter).

Conversely, if you are thinking about raising rates (like CenterState), then now is a decent time to do that.

Don’t get us wrong, the adoption of online and mobile banking will serve to lower deposit fees. Further, deposit pricing is dynamic and so there will come a day when banks will have to lower their fees to attract deposits. However, now is not that time. Banks that are lowering fees in order to raise balances or attract new customers are doing themselves a disservice.

Chris Nichols, who is located in San Francisco, is the chief strategy officer of CenterState Bank, which has its headquarters in Winter Haven, Fla.

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