Best Practices or Next Practices? Bringing Innovation to Debit Card

It’s no surprise that at a recent financial industry conference the focus of many discussions and presentations focused on regulatory changes that are affecting the profitability of banks. The Durbin amendment got its fair share of coverage as financial institutions discussed how to recoup lost debit interchange fees. Several large banks have already announced that they will be charging fees for some of their demand deposit accounts (DDAs). This hasn’t gone over well with consumers or regulators. President Obama even expressed his extreme distaste for the move. There are many strong opinions about banks charging more fees. Time will tell what consumers’ reactions will be and whether banks will reverse their position as this all plays out.

Many customers may choose to leave larger financial institutions (FIs) in favor of community banks or credit unions that in the consumer’s mind are not as predatory when it comes to fees. It may benefit large banks if consumers with high overhead leave because some of these accounts cost the bank more to maintain than their value anyway. What top tier FIs don’t want to do is lose their high value customers with large balances to another top tier competitor across the street. How can they keep this from happening? Transparency is something that consumers want from their bank. They want to easily understand the products their bank has to offer and not be surprised by hidden fees or nickel and dimed for great service. In fact, they may even be willing to pay for certain services if they perceive they are gaining value. This is exactly the approach taken by one bank that presented their strategy during the conference for turning unprofitable accounts profitable in the wake of new legislation.

Prior to regulatory changes, overdraft and debit interchange fees used to cover overhead on accounts that would be costly to maintain without them. Based on these new regulations the presenting bank faced the reality that they needed to find new sources of fee income without alienating their customers. They planned to introduce a six dollar monthly fee, but did not intend for it to be a “fee-ectomy” that gouged their customers.  Instead they utilized positive communication stating that customer checking accounts were being upgraded, rather than simply charging the fee. The upgrades include perks such as free use of any ATM (with refunds given for fees charged by other banks), shopping and dining discounts and cell phone replacement protection. The accounts also had behavior incentives that would reduce—if not eliminate entirely—the six dollar monthly fee, including signing up for e-statements, using direct deposit, maintaining a minimum balance and get this actually using their debit card. The bank refunds 25 cents of the monthly fee each time customers use their debit card. Other banks are pushing customers away from using their debit card because if they do they incur a fee. Since debit card interchange fees are nearly half what they used to be it makes more sense to encourage debit use rather than restrict it.

I liked this example because the bank found a way to make non-performing accounts profitable and created a positive message to customers with clear terms. Providing value for the new fee as well as the opportunity to have the fee eradicated through certain behavior incentives seems to be a better approach than simply tacking it on. This approach reminded me of another comment from the conference: the current focus for banks shouldn’t be on best practices, but next practices. Meaning, banks need to change and use innovation and creativity to establish the next generation of banking practices. Whatever choices banks make to bring profitability back to DDA, they are going to have to keep the consumer top of mind. Competition is going to be fierce as consumers decide what they will tolerate when it comes to fees and what type of banking relationship they want to have.