In 2009, for the first time in a multi-year Javelin survey, “too many fees” vaulted to No. 1 on the list of reasons that consumers switched banks, overtaking “moving to a new area” and “unsatisfactory customer service.” Correspondingly, when consumers selected a new institution they ranked “rates and fees” as the most important area of consideration by a significant majority, 17% higher than “customer service,” the second-highest criteria.
Call me an idealist, but I really do believe that bankers can be more successful by helping consumers win and acting as consumer advocates. I also trust that effective regulation can play a vital role in this picture, to serve personal, business, societal AND banking objectives.
Capturing consumer trust is critical because consumers say their trust in financial institutions has eroded dramatically over the past year, according to Javelin’s nationally representative online survey of 3,294 individuals in November 2009. More than half of consumers said they have less trust in the financial services industry – with the number losing trust outnumbering those with more trust by a whopping 9-to-1 ratio. This is the perfect opportunity for banks to revamp their business strategy to focus on new technologies, building customer loyalty through trust and customer satisfaction. Regulatory efforts to protect consumers will force the banking industry to reconsider an unsustainable business model built on a foundation of consumer recklessness, pocketbook mismanagement, financial illiteracy and other bad habits.
The few banks that become the trendsetters and break from the pack will be able to profit in different ways to compensate for losing money through traditional revenue streams. The banks that give consumers more control over their finances will steal customers from the banks that haven’t done so yet. In addition, when consumers can better monitor their accounts and detect fraud earlier, they help significantly reduce banks’ fraud-mitigation costs.
This sounds counterintuitive, but increased fee regulation and consumer advocacy will only help banks when facing their stockholders. If banks have no choice but to change how they capitalize on fee income, they will be able to regain consumer trust and obtain revenue in different ways – overcoming pressure from stockholders to keep traditional and profitable fee revenue streams and maximizing revenue through all channels.
Bankers must end their recent binge on punitive fees and find other ways to increase per-customer profitability. Consumers are willing to pay more for premium services, but they resent paying more for services they are accustomed to receiving for free.
This challenges banks to come up with new, innovative ways to replace existing revenue streams. The average consumer will pay more in fees if you are creative in your approach and are able to do so in a way seen as both convenient and beneficial to them. Here are four suggestions:
Shift from Punitive to Proactive Fees: Financial institutions can charge customers for new technologies and specialized services. Expedited payments offer one means for bankers to charge new fees by providing a service that actually saves customers money. Offering customers advanced, fee-based security alerts, remote deposit capture, bill payment, vault and storage offerings and credit-monitoring services will likewise enhance banking portfolios. Bundling personal financial management services with alerts and other offerings is another viable option, as it creates inherent value and can derive revenue from customers.
Add and Keep More Customers: Increasing market share by adding more customers and keeping existing customers will determine banks’ financial success. Banks should position themselves as the customer’s ally and collect fees with a “compensating balances” approach. Under such an agreement, customers would be charged fees only if they fail to uphold their end of the bargain – for example, by not maintaining a sustainable balance or overusing costly channels.
Add More Relationships Per Customer: To make the most from each customer, banks must become their primary provider and go-to resource. They can accomplish this by gaining customer trust through transparency, offering customers convenience and useful tools and through marketing campaigns that maximize customer retention. Banks can create more relationships with the same customers through investments, credit-monitoring services, mortgages, P2P and expedited payments, funds transfers, remote deposit capture, and opportunities through the electronic channels. The big payoff will come from branding messages that focus on being there for the customer and building long-term loyalty.
Cost Reduction: Banks can retain profits by reducing fraud and customer-service costs. By giving customers the avenues to communicate and bank through online and mobile channels, financial institutions will save money with more in-branch and customer-service call center availability. Additionally, by giving customers the necessary controls to manage their finances, banks can reduce their workload and benefit from lower fraud-resolution costs. If banks provide an aggregate, personal financial management alert system, for example, customers can see all of their financial information in one place. When consumers have the control to navigate through their finances, assess their needs, and see what is available to them, they are more willing to take advantage of marketing offers, thus providing banks with income opportunities.
Mr. Van Dyke is president and founder of Pleasanton, Calif.-based Javelin Strategy & Research, a provider of quantitative research on financial services topics.