Fee for All


Raising service fees requires a careful strategy—and a review of all the angles

By Kelly Pike

Managing fee income is a tricky task creating various dilemmas for community bankers. Regulators are watching, upstart financial firms are aggressively luring new customers, and many consumers are programmed to expect free checking as a right not a privilege. Meanwhile years of slim interest margins haven’t helped matters.

All of these competitive and profitability pressures are forcing community banks to reevaluate their approaches to fee income and service fees. Many are prompting change from the status quo, according to the findings of the ICBA State of the Industry survey published in January. More than half of all community banks raised service fees in some form last year, and about 80 percent plan on raising their service fees (or raising more of them) in 2016, the survey shows.

How community banks go about raising service fees—or even standing pat—is an important strategic decision. Blindly raising rates or tacking fees onto existing products or services is fraught with peril, as community bankers know. Some fees, particularly those for insufficient funds, can’t really go much higher across the industry due to regulations. Adding a few cents to a statement fee won’t raise much money. Meanwhile, many financial consumers are notoriously price sensitive, or so conventional wisdom suggests.

Yet opportunities to increase fee income exist on both the retail and commercial side for community banks willing to reexamine their overall fee strategy, consultants maintain. From adding value to existing products to rethinking how new services are introduced—and what they cost—community banks should develop a forward-looking fee strategy, they say. Such a strategy shouldn’t just respond to existing market conditions but look ahead to potential sources of new revenue.

“It’s very important for banks to look at their offerings and gauge the value of those offerings to customers and potential customers,” says Kevin Tweddle, president of Bank Intelligence Solutions in Norcross, Ga., a division of Fiserv Inc. and an ICBA Preferred Service Provider of bank profitability analysis software. “It’s really more about strategy and increasing volume and adoption, and earning the fee income off of those items.”

Market dictates

Community bankers know there is no blanket approach to setting service fees. Mostly, it’s about the competitive forces in a local marketplace, which makes an individual competitive analysis an essential precursor to any fee discussion, consultants say. A bank needs a detailed competitive survey to understand where its pricing might be high, too low or right in line with its marketplace.

“Community banks are being very specific to their market and their capabilities and picking and choosing where they raise their fees,” says Sarah Grotta, director of debit advisory service for Mercator Advisory Group, a payments and banking consultancy in Maynard, Mass. “They are being very strategic.”

Yet there are a few common pricing mistakes to consider. Some community banks align their fees in relation to those of local big-bank outlets. Others will try to introduce a new fee into their market. Both of these steps could be mistakes of differentiation, some consultants say. In the first example, community banks could miss the opportunity to differentiate themselves positively from the bigger banks as lower-cost providers. In the second example, community banks could draw negative attention.

That’s one reason why consultants recommend that community banks regularly assess their fee-income opportunities, doing so anywhere from once a year to once a quarter. Mike Holt, a partner with Profit Resources Inc., a financial services consulting firm in Grayson, Ga., suggests forming a standing revenue committee. Armed with a thorough market survey; an analysis of accounts, customers, and profitability; and information about any potential product or service rollouts, such a committee can develop strategic game plans to enhance non-interest revenue.

Discussions should include the quantitative bottom-line impact as well as qualitative factors, including whether a fee policy is too risky or strict, Holt says. Ongoing reviews keep the issue prominently in focus and allow a bank to carefully consider fee-income actions over time.

Two High-Value Fee Opportunities

It’s always easier to charge for new products and services than to add fees to existing offerings. The key is to introduce high-value offerings that customers are willing to pay for.

Stacey Zengel, president of Jack Henry Banking, a banking software and technology firm in Monett, Mo., offers two ideas for adding value to new or existing products:

Overdraft-included fee checking. Millennials grew up in a world with free checking and are suspicious of fees. Meanwhile, banks are under increased regulatory scrutiny for overdraft fees. Solve both problems by offering a fee checking account that allows for a certain number of overdrafts. For example, the bank could charge $5 a month for an account with the leeway to be overdrawn by $500 for two days. Carefully research your market to determine what would be attractive.

Small-business segment. Small business customers, including microbusinesses, are often willing to pay for products and services, especially if those clients currently use similar products and services from other companies. Find fee opportunities by providing and charging for positive pay, invoice receivables, advance payment or expense management.

The Do’s and Don’ts of Raising Fees

  • Avoid punitive fees. Customers are most willing to pay fees for added value.
  • Know what others in your market are charging.
  • When it comes to waiving fees on checking accounts, keep options simple. Limit customers to three choices.
  • Consider adding a fee when you introduce a new product or service.
  • Don’t charge for activities you want to encourage.
  • Don’t be the first to introduce a fee.
  • Don’t raise account maintenance fees—unless it’s a strategic move to flush out a large number of dormant accounts.
  • Don’t automatically raise insufficient funds fees. It could cause unwanted attention.

Finding opportunities

When studying their particular competitive landscape, community bankers will quickly see that the deposit side, specifically checking accounts, likely provides the biggest opportunity to adjust service fees, several consultants agree. Converting free checking to fee checking presents the biggest step with the biggest revenue potential.

That doesn’t mean community banks should simply unilaterally impose or raise account fees. Raising fees runs the risk of customer attrition, but Dan Moultrie, director of advisory services at Saylent, a software company in Franklin, Mass., focused on analyzing customer data, believes the risk stems not from a fee so much as its amount. There is a $5 pain threshold for basic free checking; an $8 fee will likely cause attrition, he says.

For that reason, community banks shouldn’t be too quick to eliminate free checking, recommends Rob Rubin, managing director of New York City-based Novantas Inc., which provides analytic advisory services and technology solutions. Free checking accounts are an entry-level product critical to attracting young customers, and they often prominently differentiate community banks from the biggest banks that charge monthly account-maintenance fees.

“In my eyes, acquiring primary checking accounts is the lynchpin to building a banking relationship with someone,” says Rubin, who created the website FindABetterBank.com to help consumers compare checking accounts.

While community banks are more likely than the biggest banks to offer free checking accounts, those accounts continue to evolve, Rubin says. For example, consumers have long been made to qualify for free checking accounts under specific cost-saving or revenue-generating requirements, such as maintaining a certain minimum balance, receiving regular direct deposits and using a debit card for a certain number of transactions per month. Qualifying requirements encourage customers to use the account as their main account.

Customers get confused, though, if given too many options for waiving the fee, warns Moultrie. He recommends sticking to straightforward free-checking-account qualifications such as using a debit card, online banking and accepting e-statements.

Whatever options you choose, make sure they are meaningful to customers, says Christopher Leonard, CEO of Velocity Solutions Inc., a company in Fort Lauderdale, Fla., that provides account profitability analysis software. He recalls one bank that considered adding a $9.95 monthly fee for all checking accounts that didn’t maintain an average $500 balance. The bank tossed the idea when it realized three-quarters of overdraft fees were paid by customers who didn’t have a $500 balance.

“Fees for a service are better than fees for a penalty,” Rubin suggests. “If you can provide someone with what they value, like and want [for a reasonable fee], that’s a good exchange.”

While new customers will mostly notice recurring service fees, existing customers are likely to be bothered by circumstantial fees—for example, fees for using another bank’s ATM or debit PIN fees. Fees are one of the reasons people switch banks, so any new fee proposal should come with an analysis of how much revenue a certain fee would raise versus how many customers might take their business elsewhere, Rubin says.

For community banks that want to move away from offering free checking accounts to everyone, another option is to bundle value-added services into a transaction account. Possibilities include providing with the accounts free use of ATMs, cellphone insurance, identity theft insurance, roadside assistance, purchase price protection, extended warranties, cash back, and bonus reward points or local discounts. About 30 percent of bank consumers are open to paying for such premium accounts, says Leonard, and he has clients that offer them for $9.95 to $14.95 a month.

Bundles are also growing in popularity on the commercial side as banks move away from line-item account analysis and toward packaging products offset by balance requirements or relationship balances, Moultrie says. The same holds true for debit cards, with banks adding such features as insurance and protection programs along with fees, says Grotta. Some banks are even looking at the possibility of adding fees to receive balance updates or potential fraud alerts, although she warns that requires looking at the cost structure to see if the potential savings from catching fraud outweighs the projected income from fees.

Willing to pay

The success of bundled service accounts shows that customers are willing to pay for services—if they see value in them. One area consultants agree is a prime opportunity for a transaction fee is expedited bill pay. If a customer forgets to pay her mortgage or needs to move money immediately to do so, there’s value in being able to make that payment today.

“Many consumers are certainly willing to pay nominal fees for value, but it has to be the right product and it has to be at the right service level,” Grotta says.

Sometimes it doesn’t make business sense to charge a particular fee. Consider mobile check deposit. Some banks charge 50 cents per processed check, a fee that can discourage customers from using the self-service channel for the more operationally expensive teller channel, Rubin says. Conversely, fees can discourage expensive behavior or encourage less-costly self-service channels. For instance, a free checking account might be structured to charge a separate fee for activities that cost the bank more money, such as visiting a teller or writing a certain number of checks.

That fee structure can be successful if a bank is upfront about it from the start, Rubin says.

“Many consumers are certainly willing to pay nominal fees for value, but it has to be the right product and it has to be the right service level.”
—Sarah Grotta, bank consultant

Introducing fees

Any time a community bank adds a new service, it should consider adding a fee with it, Leonard says. And when a bank introduces a new fee-based product that replaces a free or lower-cost option, the institution should tread carefully.

Damien Hayes, senior revenue consultant at Saylent Technologies Inc. in Franklin, Mass., recommends taking a new product pricing to a test market and incenting existing customers to move over to the product, rather than forcing them and risking attrition. Moultrie recommends transitioning new products or accounts over a six-month period. First, the bank should introduce the new product and grandfather the old one, giving the frontline time to get comfortable with and understand the new product. The bank should try to convert anyone who logically belongs in the new product and then, if necessary, do a mass migration of the product after six months. The transition time will give all bank employees time to understand the account’s features and create a positive experience for customers.

Finally, community banks should think strategically about the fee opportunities ahead. Two of the biggest opportunities will be mobile wallets and faster payments including person-to-person payments, Grotta says. These payment technologies are quickly evolving and are seeing lots of action from FinTech companies. Banks will have to plan how they might impact their revenues, profits and customer attraction.

“The core service is where banks are looking to maintain, [their customer base], but you really have to show you have a differentiated product,” says Grotta. “That’s where there’s an opportunity to charge a fee.”

Kelly Pike is a freelance writer in Virginia.