Part Two of a Two-Part Series
By Jennifer Jope

[Editor’s note: While fee-based revenue is still important to many banks, increased competition and consumer expectations dictate that financial institutions offer a greater number of free products. The first part of this series examined those conflicting pressures in retail banking. The second and final installment of the series looks at changes in fee structure in commercial banking.]

With any number of banks advertising free checking accounts, the changes in consumer banking fee structure over the last decade are easily discernable. But commercial customers also are looking for perks with their banking business and, as a result of increased competition, often getting them.

Local bank executives say that as the marketplace evolves, they must continually make adjustments to fees associated with both individual and business accounts. In both areas, many local bankers observe that their institutions have fewer fee-based services today compared with past years, but those fees that remain often are higher.

For several years now, consumers have come to expect free checking accounts and often seem willing to arrange for direct deposit or maintain a minimum balance in exchange for the free service. More recently, business customers have begun to request similar arrangements. And while businesses typically pay more fees for services than individual consumers, businesses increasingly are requesting options that will allow them to avoid fees by maintaining minimum balances or using other services at a bank.

“The idea of free checking on the commercial side has really taken hold,” said Gerard R. Lavoie, executive vice president of Dedham Institution for Savings.

The difference with a free business checking account is that banks will usually limit the number of transactions, Lavoie said. At Dedham Savings, business customers also can avoid paying fees by keeping a minimum balance in the account.

Lavoie said companies, especially small businesses, most often are not willing to pay for a checking account, which wasn’t always the case.

“It was difficult finding a no-fee checking alternative [10 or 15 years ago],” Lavoie said. In offering free business checking, banks today are also hoping a business will use the bank for other services such a loans, and even that owners and employees will open personal accounts at the institution.

“You try to build an account relationship,” Lavoie said.

Theodore A. Rosen, president of Expert Business Development in Pennsylvania, a firm specializing in providing sales process consulting, sales training, outsourced business development services and Web-based lead tracking systems to the financial services industry, said free business checking accounts are proliferating at community banks out of necessity and as a direct result of competition with larger institutions.

“The big banks set the tone for free checking,” Rosen said. “Community banks have to meet that challenge.”

At Natick-based Middlesex Savings Bank, fees typically are generated by commercial customers through real estate transactions, not bank accounts. David Falwell, executive vice president for business banking and commercial banking, said commercial mortgages and the fees attached to real estate closings bring in revenue for the bank.

Earning fee income through deposit products and cash management are not the main priority for the bank, Falwell said. Loans, however, remain lucrative.

“[Fees are] not the central focus of the commercial relationship,” Falwell said.

The bank offers a range of business checking accounts and the free benefits of each typically depend on minimum balances. Falwell said he finds that conversations with business customers do not tend to center around the fee structures of an account.

“They [fees] are something you need to discuss,” Falwell said, but added that, unlike many individual consumers, business customers often are not preoccupied by fees. Instead, they focus on services and later weigh whether the service is worth any associated costs.

Growing Demands

Similar to Dedham Savings, Danversbank offers a free business checking account. Commercial customers, however, are limited to a certain number of free transactions. Eileen Dunn, vice president of the cash management department at Danversbank, said the free small-business checking account limits customers to 150 transactions each month and charges 50 cents per each transaction beyond the initial 150. For the “mom and pop” businesses with less intensive banking needs, this type of account often works well, Dunn said.

The bank also offers a regular commercial account and maintaining a minimum balance can offset most fees, said Eileen Lubas, first vice president of project management at Danversbank. Having several options for commercial customers is important, said Lubas, because there so many banks offering low- or no-fee alternatives.

“It’s such a competitive landscape,” Lubas said. “Fee income used to be growing; it has become something you have to drive.”

While bankers say that fee income isn’t a huge income producer, most banks monitor their fee structures at different intervals in order to stay competitive. For instance, at Dedham Savings, Lavoie estimates fees have been reviewed once in the last 10 years and only a few adjustments were made. As those fees that do exist for personal banking services have increased over time, Lavoie said commercial fees have been adjusted only slightly. Currently at Dedham Savings, a flat monthly maintenance fee costs commercial customers about $8 these days. It was approximately $6 five years ago. Customers are charged 18 cents per check paid and 10 cents per deposit item. However, these charges can be offset by maintaining a minimum account balance. The bank introduced the free small-business checking account after enough customers requested such a service.

Danversbank conducts a fee survey twice a year, according to Lubas. A group from the bank meets, reviews each fee charged by competing banks and compares them to what Danversbank is offering. Adjustments are typically made every 18 months. While this fee survey is done for both personal and commercial banking, Lubas said the bank is more likely to hear suggestions from business customers.

“Those commercial customers are more vocal and demand more,” Lubas said.

Lubas said Danversbank often will make adjustments to business accounts based on feedback, especially if the institution is competing for a customer’s loan business.

At Middlesex Savings, Falwell said there has been a modest increase in fees over time. Although commercial fee income is not the bank’s largest revenue generator, Falwell said banks have to be creative when it comes to earnings.

“Banks have to find ways to manage profitability,” said Falwell. “Fee income represents significant potential augmentation to other sources of income.”

Arlington-based Leader Bank, which doesn’t charge for consumer checking accounts, also does not charge business customers per deposit or per transaction, said Sushil Tuli, president of the bank. The business accounts at Leader do not pay interest to the customers, allowing the bank to make money via investments. And because business customers typically bring in more traffic, Tuli said, the bank makes money in other ways.

“Bring in business customers and they maintain balances in non-interest-bearing accounts,” Tuli said, adding the bank can then invest in those accounts and compensate for not charging fees.

For a de novo institution like Commonwealth National Bank in Worcester, growth – especially loan growth – is more important than charging commercial customers fees.

“We’re still in a heavy growth mode,” White said.

However, because it costs banks to process each deposit item, the bank charges commercial customers for such transactions. Andrea White, senior vice president and chief retail officer at Commonwealth National, said customers can avoid these fees by maintaining minimum balances. Construction loan fees have been a good source of revenue for the four-year-old bank, said Bill Mahoney, chief financial officer. Each time that money is advanced for a construction project, the bank charges a fee.

After hearing the pricing of an account, White said consumers prefer to pay few, if any fees. Commercial customers, on the other hand, are provided with a proposal by Commonwealth National to understand the fee structure that is best for their company.

While the more established banks say they are listening to their customers when it comes to fees, White said the bank tries to watch the marketplace and not price over market or be overly aggressive.

“We may react [by changing the fee structure] based on what is going on in the market,” White said.