By Dave DeFazio
Did you know that about 35% of the average bank’s checking portfolio doesn’t generate enough revenue to cover the costs to maintain and support those checking accounts?
This reality is a major dilemma for bank executives. Banks rely on fee revenue from checking as an important source of overall income, but free checking has so devalued the worth of checking accounts in consumers’ eyes that they simply don’t want to pay for those with basic, traditional benefits. Take it straight from a few consumers we interviewed:
Luckily, this video is more than just a testament to modern fee aversion. If you listen closely, there’s an invaluable piece of advice revealed in a seemingly simple comment: “I guess if I were going to pay something extra, I would want something in return.”
Shelly Loftin, chief administrative officer at Arkansas-based Bear State Bank, was one of the banking executives struggling with the fallout from free checking: “When putting a pencil to the math, we realized that we were losing money on a majority of our checking accounts. We needed to switch from a free checking product to a paid one, but we also needed a way to add value to our customers and give them something they thought worth paying for.”
These quotes illustrate that both consumers and banks are beginning to catch onto something important. It’s not that customers don’t want to pay any fees. It’s that they simply don’t want to pay fees for the services they can receive or have been receiving for free. Who can blame them?
Building in value.
Today’s banks are learning that they must build additional value into their products if they expect to generate customer-friendly fee income and ensure their services are competitive. The most compelling value is linked to customers’ daily activities, either enhancing them in some way or adding convenience.
For Loftin and Bear State, that meant including a rewards program with paid checking accounts: “We thoroughly changed our product lineup so that value-based checking became the main attraction. We offer a couple of products that don’t include rewards, but none have been nearly as attractive as the rewards-fueled accounts.”
Why discount-based rewards? That happened to be another piece of advice that came straight from consumers.
The 2016 North America Consumer Digital Banking Survey recently conducted by Accenture saw that about 45% of respondents identified access to deals, discounts, or rewards as the main motivator to stick with their current bank. Customers are telling their banks what they want. Now all banks have to do is listen.
The rise of the subscription society.
Finding the benefits that would most resonate with customers is an excellent start, but in order for those benefits to have the greatest impact, banks must also present the best model for delivering them.
Luckily, consumer trends outside of banking can provide insight into what’s been most successful.
Lately, there’s been a mass shift to a subscription-based purchase model wherein consumers pay for services in regular installments as opposed to buying a product outright. To put their popularity in perspective, as of March of this year:
- Amazon Prime had 80 million subscribers
- Netflix had 98.75 million subscribers
- Spotify had 50 million subscribers
And those numbers have only seen a steady increase over the past few years.
These services have been amazingly successful because they provide a high level of value at a reasonable monthly cost, and they deliver a personalized and relevant experience to each consumer.
Bear State took a nod from these subscription services when modeling its own offerings and partnered with a mobile rewards provider. For a small monthly fee, the bank provides checking customers with access to a network of over 360,000 discounts nationwide, delivered straight to their smartphones through a customized app and location-based push notifications when they’re in the vicinity of a deal. Customers can personally tailor their experience so they only receive notifications for the places they frequent or the types of businesses that are of interest. Customers also receive other subscription-oriented benefits like roadside assistance (similar to AAA) and cell phone protection (similar to Verizon, AT&T and others).
Loftin added, “We remind our team members all the time that it’s important for them to fully understand the value they provide to our customers and expect for there to be a value exchange. We don’t buy products from other stores and expect to walk out without paying in some form or fashion, and the same is true for banking services. Understanding that basic value proposal is much easier for customers with the tangible benefits provided by BaZing.”
The benefits for banks.
Obviously, for banks one of the biggest benefits of providing additional value is that they’re able to drive more customer-acceptable fee income. By providing services beyond the basics, and offering clear and relevant value, they can fairly charge a monthly fee.
As Loftin put it, “Before offering rewards, checking was a loss leader for us. The rewards-based model has certainly lessened that blow.”
More importantly, offering paid accounts has the potential to completely transform the face of the customer-bank relationship. Rewards empower banks to engage customers beyond the door of the branch, and banks can even gain further visibility by utilizing notifications to actively remind customers of the value they’re providing. When customers feel their bank is delivering services that enhance their day-to-day lives, they begin to approach their bank more relationally as opposed to simply viewing it as a repository for their money.
“The rewards product itself not only enhances the value of checking accounts for our customers, but opens up a space for value-based conversations among them and our team,” said Loftin. “We’ve become huge believers in the rewards app ourselves, which makes it easier for us to relate to our customers and turn checking accounts into an ongoing conversation about financial habits.”
And the bank isn’t the only one benefitting; their customers are, too. Beyond access to discounts at their favorite stores, rewards also encourage better spending and saving habits as a result of capitalizing on discounts.
“Our customers have started to see that the bank is providing an ongoing service and is interested in building a relationship beyond branch doors,” said Loftin. “We’ve gotten lots of good feedback. Mostly it’s the quickest and most immediate benefits like excitement about finding a discount at a favorite store. The little things make all the difference, but they also lead to so much more.”
As Loftin points out, the advantages to customers transcend mere cost savings. Customers will benefit even further from more invested relationships with their bank, as they’ll begin to see it as a source of financial guidance. With this new perspective, they’ll be more likely to seek out financial advice or buy additional products that further improve their financial wellbeing. This is an obvious benefit to banks, too, as it helps them further increase revenue, both through cross-selling their products and avoiding attrition costs. Considering that each customer lost costs banks an average of $750, this is a major advantage.
While free checking still has a role in the banking world, albeit a diminishing one, providing customer-friendly fee-based options rooted in relevant rewards provides banks the opportunity to deliver real value to their customers that justifies monthly fees. With incentives tied to the checking account, banks’ customer engagement and checking portfolios will undoubtedly increase, and both parties will reap major benefits.
Dave DeFazio is partner at StrategyCorps, a Nashville-based firm that provides financial institutions across the U.S. with mobile and data solutions that protect and grow customer relationships. LinkedIn. Twitter.