June 2009

• Download Article

Checking 2.0: Rewriting the Contract with Customers

By Hank Israel & Sherief Meleis

Free checking was a powerful marketing tool in its heyday, but it also provoked a serious profitability imbalance with the great majority of average customers. Now, as economic and regulatory headwinds swirl, the time has come to develop a more sustainable business model that does not depend on penalty fees levied on a small subset of accounts.

The stakes are high. Along with anchoring customer relationships at retail banks, checking accounts constitute a major line of business that generates more than $50 billion in annual revenues. The category, however, is under siege.

In fact, the U.S. checking industry is facing a $5 billion to $10 billion drop in annual revenues as penalty fee income withers in the face of pending disclosure regulations, combined with potentially more onerous Opt-out or Opt-in requirements of Regulation E of the Electronic Funds Transfer Act.

This upheaval comes at the precise moment when banks are straining for earnings to rebuild capital. And that’s on top of a slowing economy that has reduced transaction volume and attendant revenues from penalty fees, debit interchange and other services.

While the situation poses a clear threat, we also see it as an opportunity to fix an unsustainable business model and establish a healthy new foundation for the business.

Yet as banks try to rectify the staggering caseload of unprofitable accounts created by free checking, they run a very real risk of putting people off, as opposed to winning them over to new arrangements. Instead of slapping fees on anything that moves, therefore, progressive banks are adopting a three-stage process to rewrite the contact with checking customers.

• The first order of business is to improve customer interaction, both by better ensuring that new accounts mature into active usage, and by improving retention of various categories of high-value accounts.
• Then with current products, there are opportunities to improve account economics through judicious revisions to the terms of established accounts, and also to introduce innovative new arrangements in the course of ongoing customer acquisition.
• Longer term, banks can distinguish themselves by developing new checking products and services based on a segment-level understanding of customer needs.