I’ve been having a recurring nightmare about what the world of banking will look like post-apocalypse.
If by “apocalypse” you think I mean post-financial crisis, ha ha, no. That’s not the apocalypse. The end of free checking? Now that’s the apocalypse.
Banks have relied on free checking accounts for a while now to attract new customers. OK, to be exact, they’ve relied on what they call free checking accounts. Because it seems to me they’ve been anything but free. Oh sure, there’s no monthly fee for the account, but the people who open them still end up paying overdraft fees, ATM fees, and who-knows-what-else fees.
I say “who-knows-what-else” because, well, I don’t know. My checking account isn’t free, but because I don’t overdraw, don’t use ATMs that I shouldn’t be using, and keep way too much in the bank across a number of accounts, my bank wouldn’t dare charge me any fees. So I’m really not clear which is really the free account, and which will go by the wayside in the near future.
But it does seem possible that the so-called free accounts will be discontinued — and, in fact, a number of banks have already changed their product line.
As a result, there’s a lot of discussion about what’s next and what banks will do in this post-apocalyptic, post-free checking world.
Personally, I’m not sure why there’s so much interest and speculation.
Despite claims that it’s really hard to switch banks, most banks I talk to still tell me their attrition rates are in the double digits. And this doesn’t even count what one bank calls “silent attrition” — accounts that don’t close, but see their balances and activity dwindle to next to nothing.
So the reality has been that free checking has hardly been the solution to anything, except possibly attracting new accounts that might not stick around for very long.
In 2008 I analyzed the site visitor data from FindABetterBank.com for an Aite Group report I wrote. What I discovered was that the 4,000 consumers who had visited the site fell into one of three buckets: Those looking for accounts with: 1) No fees; 2) Superior technology-based features (i.e., online banking, bill pay, etc.); and 3) The best interest rates (and who were willing and able to keep $5000 or more in their accounts to earn those rates).
This might not seem earth shattering, but walk into any bank branch, ask about checking accounts, and see if the person you talk to is able to explain anything but the free account.
The biggest problem banks have in this post-apocalyptic world is that they don’t know how to sell anything except their free account. If that goes away, what are they going to do?
That’s where my nightmare comes in. My nightmare is like that Bizarro Jerry episode from Seinfeld where there’s this parallel universe and three characters the exact opposite of Jerry, Kramer, and George.
My nightmare is bizarro banking. Except that in this parallel universe, the characters the banks meet aren’t their opposites, but an image of what they will become. Namely: The telcos.
Yes, in my nightmare of post-apocalyptic banking, banks adopt the tactics of telcos, and seek to reduce their attrition problem by locking customers in with contractual arrangements and promos.
Open up a new account, get your fees waived for six months, and agree to a 2 year term. Then after the six months are up, and the fees are about to kick in, the banks will tempt you with an offer to extend the fee waiver by another six months if you open up a savings account or another checking account, and extend your contract by another year. And so on.
Hey, if you can’t earn loyalty, you might as well buy it.
The problem, here, comes down to value. Or more specifically, lack thereof. Perhaps this is overly idealistic, but I was thinking that it might be nice if banks turned to providing more value to the customer relationship as a way to build loyalty, instead of searching for contractual ways to lock people in. Maybe it’s just me, but the last thing I want it is to deal with more firms like the telcos.
I guess the question is — in order to transform my nightmare into a pleasant dream — what could banks do to add more value? Plenty. Just not enough space here to get into it.
Hard to charge for something once you’ve given it away.
My take is that free checking will continue but will be increasingly funded by contextual ads a la adwords. People would don’t want to see the ads will pay a fee.
An interesting post. The Mahatma Meerman Scott talks about coercive marketing (most advertising and the kinda’ deals the telcos offer on cell phones you mention) as being long-used but sub-optimal.
My lay instincts are to suggest your quest for value-offered will be found in credit unions and community banks.
I haven’t the faintest whether North Fork Bank maintained the mantra of value post the Capital One deal, but they certainly grew stupendously by being close to the customer and offering value that derives from being familiar with/local to the customer, at least as far as service decisions go and maybe some product definition.
Best,
Doug Brockway
Didn’t Walmart want to start its own bank? With all the banks closing, perhaps they’ll give it another go. Walmart could offer free checking, and all the locations would be inside existing stores. This additional traffic would result in store purchases, thus paying for the banking services. They could even offer a rewards system surrounding purchases at Walmart.
If that works, generating sales and large deposits that Walmart could use for their own purposes, look for other large corporations to offer free banking services, such as “Bank o’ Starbucks” — just tell your barista/teller that you’d like your checking grande extra hot with room, please.
Oh Walmart still wants to open a bank in the US. The problem is they are continually being blocked by lobbyists. I have no doubt that they allow banks into their stores so they can figure out what not to do.
hahaha …. there is no free bank account as you noted. It never existed and never will. If a bank account was ruled by the investment side of the regulatory police, the word free would not be permitted because money sitting with no return is not free.
The answer to your post apocalyptic bank account world is simple. Lots of fees charged by banks.
The interesting thing might lie in the alternatives that are not bank accounts per se, but payment methods that don’t exist today. But the checking account will be defunct.
Intriguing nightmare, but I would give it low chances of actually happening due to:
- There is currently no regulatory requirement that would prevent you from doing so, but it could be quickly created (see what happened to conversion plan of Citi free checking accounts this past Monday. Reg DD is clear in stating that product changes require a minimum of 30-day notice: Andrew Cuomo arbitrarily changed that to 1-year in NY)
- Not sure about the profitability of that business model. Unlike telco you can open as many checking relationships as you want (40% of U.S. households have multiple checking accts): to have an account with low customer engagement after 6 months is expensive to banks.
- Free Checking will continue to exist: banks with high branch costs will likely eliminate the product; banks with a different business model will keep it and enjoy organic deposit growth that in the past was achievable only through pricing efforts. This particular model will likely push more customer towards online-only banks
Banks already have closure fees in their checking models (i.e. if you close the account during the first 6 months you are charged a fee of $15.00 for example), but, unlike utilities or telcos, this fee is seldomly collected: it is not worth the cost to pass an account in negative balance by a small amount to a collection agency or to try to recoup it internally
Chris del Balzo
Thanks for commenting, Chris. You’re probably right about the likelihood of this happening. But many banks have acquired the idea over the past few years that their branches should be places like Starbucks where people would hang out, drink coffee, access wifi, and — presumably — open new accounts. If they believe that’s a good model, who know what they’ll think of the telco model.
You might get some inspiration from looking at how some retail banks overseas have evolved. In New Zealand for example, checking accounts are rare now.
Fees are just fees and generally use a fairly simple model where the more value you provide to the bank (eg mortgage, insurance, term dept), the less fees you pay. There are some loss leaders for some things like student accounts but that is pretty much standard retail thinking.
The really interesting bit is the range of advanced products that the banks are using for differenciation. Things like account groups where you have 10 different accounts set up for different expence types. Your pay is automatically distributed across these using your settings.
Have been out of the states for a while so don’t know if this is common back there.
Take home message: future of banking should be product innovation lead by knowing what your customer is willing to pay for.
Sorry for any typos. Using iPhone tonight.
Thanks, DMac. No worries on typos. It’s been my impression for a number of years that banks in both New Zealand and Australia have been ahead of US banks in terms of new product development from a retail perspective.
Ron, you frequently imply that banks and credit unions have widely deployed branches where people can hang out like they would at a Starbucks or an internet cafe. These kind of branches aren’t as common as you suggest.
I’ve worked with over 200 financial institutions on their branch models. Very, very few have even considered the cafe idea, and even fewer have tried it.
Yes, there is Umpqua, Gold Coast Cafes and ING Cafes. But it seems unfair to characterize the entire industry as crazy and unpredictable over the branching choices of a few.
Yeah, you have a point there. My perception is influenced by the disproportionate amount of press those efforts get in the trade publications.
They get a disproportionate amount of press because no one wants (nor needs) to read articles about “yet another branch that looks just like the other ten of thousands that are already out there.” People want to read about what is new, different, innovative and unusual in their industries, regardless of whether people like you and me think the ideas are silly or awesome. These types of branches may not be practical or successful, but they are newsworthy.
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