The Difference between Free Checking and a Demand Deposit Account
Since the Reg E restrictions on overdraft were announced, speculation has run rampant about the future of free checking—in fact, the future of all DDA accounts. Many speculate that free checking will end, although David Kerstein of Peak Performance Consulting, noted early on that bankers are convinced that everyone else will eliminate free checking, but not them. Given the propensity of consumers to switch for free checking, it is likely that few banks will truly abandon the model. The more likely outcome is that the idea of DDA accounts will transition to something new. This transition has actually been underway for some time and Congress may have simply pushed it along.
First, consider that checks are basically dead. Second, debit cards have not only displaced checks, but also passed credit cards as a preferred payment vehicle. And finally, consider the difference between a prepaid payroll card and a debit card linked to my checking account with direct deposit. For most consumers, the role of a demand deposit account has morphed dramatically from a “checking account” to a debit card funding account. As an industry, we need to recognize change in the market and adapt along with our consumers.
I recently spoke with a banker who took the rhetoric of “no free checking” in a new direction. He said his bank is considering the elimination of checking accounts. After I recovered from the initial shock—after all, what is a bank if not DDA—I asked what he was thinking. The answer was as surprising as the initial claim. “Banks offer checking accounts for nostalgia and profit, not because consumers want or need them.” His point is that consumers are seeking an efficient and painless method to link their paycheck to spending and saving needs. The checking account is not the only way to accomplish this and he hopes his institution will look beyond the current fray and connect with consumer needs in a new way.
I am not proposing the death of DDA, but I think it’s worth looking beyond a desire to replace fees and consider what is needed to reinvigorate the demand deposit market. Perhaps promoting your debit cards as an alternative to payroll cards would entice new clients, including commercial accounts. Perhaps eliminating the most costly operational aspects of your accounts would change the balance to your favor. Have you considered a fee for every check (Citi’s basic checking charges $1.50 after the first 6). Although this approach failed 25 years ago, consumers who rarely write a check may be receptive today. In fact, what if you offer a DDA account that doesn’t allow for any checks. Consumers regularly pay for cashier’s checks: what if you eliminate personal checks and dispense cashier’s checks or money orders at the ATM? Charging for costly services like paper statements and check images also makes sense.
What are banks actually doing? The first imperative is to consider the operating costs of your DDA platform. Many institutions haven’t made improvements to their account opening process in a dozen years. Better software, better (and cheaper) data, and better analytics are available today to improve the profitability of your accounts. While many bankers are reviewing their existing accounts and product offerings, the account opening process is sadly out of date at most banks.
The second important step is to reconsider your cross-sell programs. Few banks are truly effective at cross-sell and even they rely heavily on the talents of a few exceptional employees. This is an area where effective technology and new predictive models can have a dramatic positive impact on the profitability of DDA.
If we think of demand deposit as a foundational relationship for other profitable relationships, a new level of profitability is possible. The key is to step back from the traditional DDA account relationship and look for a broader financial relationship based on consumers’ needs and lifestyle. With good science and a little luck, we may find ourselves newly relevant and valuable to consumers.