Part One of a Two-Part Series
[Editor’s note: While many banks are seeking ways to bolster shrinking profit margins with new sources of non-interest income, changing consumer habits and greater competition are increasing the necessity to provide products like free checking. Many local bankers say their institutions are less reliant on fee-based revenue than they were in the past and now offer more no-fee services simply to establish relationships with customers. The first part of this series looks at those conflicting pressures in retail banking, while the second half of the series will examine the changing fee landscape in commercial banking.]
Paying for a bank service, such as a checking account, was once considered the norm, but these days few bank customers are willing to pay much, if anything, for core consumer bank services. Despite that change in consumers’ attitudes and greater competition that has led a growing number of banks to offer free products, many local institutions still rely heavily on fee income. Other financial institutions, however, are focusing on different revenue streams and decreasing their reliance on fees.
According to a recent American Bankers Association survey, customers “trust banks,” “avoid fees” and typically choose debit cards as their preferred method of payment. The survey revealed that of the 1,000 consumers questioned, almost half choose plastic over paper for everyday purchases, with 31 percent choosing debit cards. As for bank fees, 65 percent of consumers spend $3 or less in monthly fees for banking services, such as checking account maintenance and ATM access.
As customers use their debit cards more often, banks are seeing a windfall. According to Gerard R. Lavoie, executive vice president of Dedham Institution for Savings, the bank generates some of its income from debit card fees. However, customers aren’t paying those fees; merchants are.
Danversbank also pushes customers toward debit cards because the bank makes income from the fees paid by retailers, said Eileen Lubas, first vice president of project management at Danversbank.
It is likely that banks will continue to reap the rewards from debit cards. According to the ABA survey, 46 percent of consumers say they use debit cards more often than checks for everyday purchases because they are faster and more convenient. Another 38 percent of respondents said they prefer to pay as they go using debit cards rather than credit cards.
Overdraft protection fees are one big area in which banks may earn consumer-related fee income. Lavoie said some customers like to have the protection in case they bounce a check and the bank charges for that convenience. Currently, Dedham Savings charges $20 per overdraft.
Danversbank offers an overdraft privilege program in which the bank will pay a check that otherwise may have bounced (up to $750, depending on the account), Lubas said. In the past, if the check had been returned, customers might pay both a fee at the bank and be charged by a merchant. With that protection, the customer pays $25 to the bank per item that is paid. However, Lubas said it is a controversial product that the bank monitors carefully.
While there are some hefty fees associated with overdraft protection, most banks say there are fewer and lower fees in other areas of banking services.
“We give a lot of stuff away,” Lavoie said.
For instance, Dedham Savings doesn’t charge for new checks. The bank also is part of the SUM ATM network, allowing consumers to avoid frequent ATM surcharges.
Consumers can avoid paying fees on checking accounts, as well.
“There’s a whole bunch of different ways to get a no-fee account,” Lavoie said, such as having a minimum balance or direct deposit.
Wire transfers, safe deposit boxs and money orders all have fees associated with them, but Lavoie said they don’t amount to enough to be a main producer of income.
“If you combine all these areas of fee income, they come up to [less than one-half of 1 percent of the bank’s total revenue],” Lavoie said.
‘A Shift in the Burden’
Other banks in the Bay State barely rely on fees, but instead offer no-fee products in hopes of building relationships with customers that will bring in more lucrative business, such as loans.
Sushil Tuli, president of Arlington-based Leader Bank, offers completely free checking accounts. There are no stipulations attached to the accounts. Customers are not required to have direct deposit or minimum balances, nor do they have a limit on checks.
“It builds customer loyalty,” Tuli said.
However, the bank must find income using other avenues. Tuli said when a customer has a checking account with the bank he is more likely to use other revenue-generating services at the institution, such as certificates of deposit and mortgages.
“That is where we make our money,” Tuli said. “We didn’t build a bank model based on fee income.”
Like other institutions, Leader Bank generates revenue from overdraft protection charges of $15 per item.
Tuli said banks can make their money in other areas, especially because the customers who are charged fees often are the ones who can least afford them.
“Banks should not charge these fees,” Tuli said. “It’s the ones who don’t have the money that get hit with fees” because they cannot keep minimum balances.
Jim Briand, senior vice president and director of marketing at Natick-based Middlesex Savings Bank, said bankers have long struggled with the idea of free checking.
“That’s a major discussion … when is ‘free’ free?” Briand said.
At Middlesex, customers have access to free checking so long as they have direct deposit. Briand said the bank gives customers credit for loan and CD balances, which can also offset a fee in a checking account. Middlesex makes some of its income on miscellaneous fee-based services like wire transfers and money orders.
The overall trend in the banking industry regarding fees, Briand said, is that fees are being charged to some customers and not all of them. For instance, the select group of consumers who bounce checks are paying more of the fees, whereas other customers are avoiding fees by keeping minimum balances or having direct deposit.
“What you see is a shift in the burden,” Briand said.
For Commonwealth National Bank in Worcester, which opened four years ago, generating fee income has not been part of its strategy.
“It’s not a significant amount of revenue,” said Andrea White, senior vice president and chief retail officer at the bank.
Bill Mahoney, chief financial officer at Commonwealth National, said fee accounts for only 4 percent of the bank’s revenue.
In general, however, banks are trying to expand fee income to offset declining margins, Mahoney said. But for Commonwealth, fees are not a main concern.
For the banks that are charging customers, there has been a change in the fee landscape because of competition and industry consolidation.
“Customers have been well-educated that they don’t need to pay [the same type of fees that were common 10 years ago],” Lavoie said.
In the past, customers typically would pay monthly fees that could add up to between $20 and $30. When Internet banking began taking hold, Lavoie said most banks were charging for online billpay services. Over time, as competition has grown more fierce and public demand for that option has increased, many banks realized they shouldn’t charge for the service but must still offer it simply to entice new customers and retain existing accounts.
At Middlesex and other area banks, Briand said he has seen fees for online billpay services consistently decrease over time.
“Banks discovered it was in their best interest [to decrease or abolish the fee],” Briand said, because customers are more likely to stay with their bank if they use its online billpay service.
Lubas said consumers are more “astute” and “sensitive” when it comes to paying fees in today’s market. And although fees have increased over time due to inflation and competition, Lubas said there are increasing opportunities for savvy customers to avoid them. More customers seek ways to avoid fees by maintaining minimum balances and using direct deposit. Even so, Lubas said consumers aren’t the only ones keeping an eye on fees these days.
“Banks have paid a lot more attention to [new sources of] non-interest income,” Lubas said.
