Small-business Banking Strategies: Providing Peace of Mind (for a Fee)

kabbage_need_cash

Business owners are optimists. It’s a job requirement. So whether or not a small business is currently seeking capital, most hope to grow down the road, so the POTENTIAL to tap more funding is a huge factor when selecting a bank. It’s why small businesses have long sought to establish quality relationships with community banks or larger FIs.

But in the aftermath of the 2008-to-2012 downturn and all the negative press about the “credit crunch” (both real and imagined), business owners are less confident that their bank will come through for them when they need it. That’s why banks should offer credit to ALL small- and micro-business customers. It doesn’t have to be a large amount, or free of fees, or at an APR that would make the CFPB happy (it’s commercial credit we are talking about). FIs just need to demonstrate they have their client’s back.

small_bus_bank_iconAlong the same lines, most banks could do better providing peace of mind. The most important factors are transaction/payment reliability, service quality and, probably most important these days, security. Again, it’s about the peace of mind knowing that your bank will run your account flawlessly while keeping thieves at bay. And failing that, reimburse the losses without a business disruption.

These things cost money. But the good news is that businesses understand that and will pay for it. Most growing businesses are price-insensitive when it comes to their transactional bank account. It’s just not a material expense, especially if you factor switching costs. In fact, I have long stated that I’d be happy to pay $500/mo for a business banking account with my ideal mix of banking, security and accounting services.

That said, it won’t be easy to get to three-figure monthly fees for SMB banking. Here’s a more normal example, a fictional starter business bank account priced at $50 to $60/month ($10/mo less if paperless):

  • Checking account/debit card
  • Small-biz-branded mobile-banking app
  • Security and transaction alerts
  • Outbound payments (billpay, P2P, mPay, ACH)
  • Inbound payments (ACH, P2P, cards, mPOS)
  • Bundled credit facility (line of credit and/or credit card) with overdraft protection
  • $10/mo discount to go paperless (no paper checks, no paper statements, no in-branch deposits)
  • Credit score with alerts (sourced through Credit Karma)
  • Account scanning for fraud and questionable charges (sourced through BillGuard)
  • Loan concierge to help the business find funding (via alt-lenders if needed)
  • Basic accounting/money-management tools (outsourced to Mint, FreshBooks, Expensify, etc.)
  • Commercial eBanker (email night and day with same person if possible)
  • Fraud-loss guarantee for first $5,000, then $x/mo per $10,000
  • Multifactor security using mobile phone/GPS
  • Basic business property insurance for first $5,000, then $y/mo per $10,000
——
Graphic from alt-lender Kabbage

 

Open Letter to U.S. Banks Re: Consumer Pricing in the Digital Era

old_letter_stamp1

August 21, 2015

Dear Ms/Mr CEO:

Congratulations on making it through the most trying time in banking since the 1930s! That was some ride, wasn’t it? And now that you are on the other side, what’s your reward? Alienated customers. Massive new regulations. Escalating costs. Technology obsolescence from deferred development. And now, new competition! Both from less-regulated fintech players with fancy APIs, and aggressive digital marketers at the mega-brands.

So, I can understand your reluctance to avoid anything that smacks of a price increase. Why risk losing another household? And your customers are already testy over interest rates so low they look like a typo. It’s a lot easier to keep checking accounts free of monthly fees and make it up on the back-end with low-balance and OD/NSF fees.

But we all know that’s not sustainable. The $35 dollar overdraft will soon go the way of 1.5% interchange on debit cards. If there is anything we’ve learned in the internet era, it’s that hidden fees are eventually uncovered. And even if you don’t buy that, the CFPB will make you a believer sooner or later, especially if the issue rears its head in the 2016 election cycle.

I know this is going to hurt, but I’d like you to seriously consider getting rid of consumer OD/NSF fees altogether. Or at least roll them back to the $10 range where they’d be much more defensible. I know this is not going to be good for the short-term stock price and/or compensation. But it’s a logical consequence of becoming too reliant on fees that hit hardest to those with lower balances.

But weaning off of OD/NSF revenues doesn’t have to decimate your P&L. And it could even prove better in the long run. Here’s my (admittedly over simplified) 4-point plan to make up the fee income shortfall:

1. Move customers into subscription-based “overdraft protection”

The best thing that ever happened to me, in terms of my own banking usage, is when I found US Bank’s overdraft protection, a line of credit with automatic, unlimited and fee-free overdraft transfers to checking. I never had to worry about my checking balance as cash flow ebbed and flowed over the course of the month. I paid a $35 annual fee for the credit line, but I gladly would have paid much more ($7 to $10/mo?) for the peace of mind. In addition, I happily paid 12% APR on my credit balances each year. That varied, but I’m sure I racked up at least $100 in finance charges every year. It was a huge win for the bank, and I was very happy. Sadly, the bank no longer offers fee-free transfers, but I hope they bring it back.

2. Introduce subscription fees for premium services

If you offer a good product, you have to be upfront and charge for it. And it doesn’t have to be an across-the-board fee increase. Let customers self-select into higher-priced options. Want to talk to CSR at 2:00 a.m.? That comes with our $5/mo gold package. Like more security? Yep, we’ll guarantee you’ll never lose a dime with our $7/mo Fort Knox upgrade.

3. Charge for faster access to remote deposits

Region Bank’s pricing for remote deposits is one of the smartest moves I’ve seen in my 25 years in banking. Unless they hold a patent on this, I don’t understand why everyone hasn’t adopted it. Granted, there’s some technical, service and operational issues, but there’s also the startup InGo Money, who can do much of the heavy lifting and even take on the risk exposure if that’s an issue. InGo Money is already powering mobile deposits for a pile of prepaid issuers including BB&T Bank and Moven.

4. Get into the insurance business

This may seem like a random suggestion, but think how much better it would be for your brand to replace negative penalty fees with products that increase peace of mind. There are many ways to enter the insurance business, but one of the fastest ways to jump-start an online program is through the Insuritas white-label program (see last year’s Finovate demo).

I apologize for sending this letter just when you were enjoying the end-of-summer holidays. But with the 2016 planning season just around the corner, there is no better time to diversify your fee-income stream.

Sincerely,

Jim Bruene

Is it Time for Digital Banking Subscription Fees?

image Now that we are 30 years into the online banking era (and nearly 20 years of web banking), it’s time to start making the channel pay its way (or at least contribute something). Even though your customers might think otherwise, there is no rule that says all your online and mobile banking must be free of charge.

Yet, across 10,000 U.S. banks and credit unions, only a handful are still charging for digital value-adds (other than expedited and/or P2P payments). The biggest outliers (all previously covered):

  • Regions Bank’s variable mobile deposit fee dependent on speed of funds availability (post)
  • MyVirtualStrongbox (from DigitalMailer) deployed at 11 credit unions including Belvoir Credit Union; generally free, with optional fees for extra storage (post)
  • US Bank’s per-item $0.50 charge for remote deposits (post)
  • Mercantile Bank’s $4/mo consumer positive-pay service (post)

Please tweet new examples to @netbanker.

________________________________________

Make Digital Banking a Profit Center
________________________________________

Most digital innovations of the past 15 years have been justified with a combination of soft dollar benefits (aka intangibles) such as retention, customer satisfaction, competitive pressure, etc. Those are vitally important. But without profits/revenues, customer satisfaction is moot. 

So let’s put an end to the “100% digital banking subsidy” and start charging something to those most likely to pay — your digital power users.  If that segment coughed up an optional $3.95/mo for your Digital Gold account, you’d be earning a half-million dollars annually per 10,000 subscribers. That’s money that’ll come in real handy when the CFPB caps ODs at $15 each.  

What type of services might be included in this “gold/platinum/VIP/premium” account? It depends on your brand and market, but these could be relatively cost effective:

  • Priority service (4-hour turnaround time)
  • Dedicated email/text message address
  • Expanded “Help” hours/availability
  • Expedited funds availability
  • Higher limits
  • Additional security assurances/alerts/monitoring
  • Lengthier statement/image archives
  • Free intra-family transfers
  • Special edition (different skin) mobile banking app
  • Random membership perks (local deals, 2-for-1 dining, etc.) 

Check out more ideas in the Netbanker archives or refer to our annual planning report (subscription).

————————

Note: I run a variation of this topic every year or so, along with the occasional full report.

Billpay: After 20 Years as a Loss Leader, Check/PageOnce Shows Path to Profitability

image

In the United States, banks have squandered $10+ billion providing free billpay during the past 12 years. But that’s about to change, if the model from Palo Alto-based Check (formerly PageOnce) takes hold.

First, a history lesson for anyone born after 1980.

For the first few years of the online era (mid-1990s), “electronic bill payment” was offered by banks and credit unions with monthly fees of $5 or $6. That made it roughly breakeven, at least if you didn’t count the sometimes heavy burden on customer service to solve problems caused by the very analog back-end of the so-called “electronic” service.

But then in 2002, Bank of America ruined even that by offering free billpay and advertising it widely on television (note 1). It even released internal data purporting to prove that what the bank gave up in fee income was more than compensated by intangibles such as higher deposit totals and lower customer churn (note 2). I like to think that if Bank of America had read their OBR more closely, it would be booking an extra $300 million per year in fee income (note 3), but I digress.

Back to present day: American consumers have grown accustomed to free billpay, and I don’t think that will change. But that’s what makes Silicon Valley’s mobile-billpay upstart so intriguing.

Let me introduce you to Palo Alto-based Check (still better known as PageOnce) which originally launched as a personal scheduler (hence, the original name). It quickly morphed into the first native mobile PFM, landing on the scene in 2008, just a year after Mint launched.

But given the difficulty of monetizing budget-and-spending PFM, Check has tried several ways to earn revenue including offers, credit bureau monitoring, subscription billpay, and now transaction-fee-based billpay. Apparently, the last has the most promise, so the company rebranded as Check (with URL check.me), a big risk given the prominence of its PageOnce brand.

_______________________________

How it works
_______________________________

1. Choose biller from previous entries or add a new bill (see screenshot #1)

2. Enter account number with biller OR enter username and password and a check will download for you (screenshot #2)

3. Choose amount (screenshot #3)

4. Choose speed of payment (screen #4):
– Scheduled
– Send now: Standard
– Send now: Expedited

5. Choose payment type: Credit card, debit card or bank account (screen #5)
(Note: credit card option is not available for paying other credit cards, which is a Visa/MasterCard rule according to the company).

6. Confirm and pay (screenshot #6)

And now for the twist. Were you imagining this service displayed across your spacious desktop browser? No way. This is mobile-only and works like a charm, though the fees are a little confusing (see below).

The mobile interface is great, using state-of-the-art technology tricks to cut down on data entry:

  • Mobile camera used to import card details, powered by Card.io (see screenshot #8)
  • Account aggregation to gather billing info (note 4)
  • Comfortable mobile layout for selecting payment options

____________________________

Pricing
____________________________

Check has free billpay of course. Just enter your bank account details, schedule the payment at least a week in advance, and you are good to go. However, for those not quite as organized, or who don’t like revealing their checking account number, users can choose to pay a 4% fee (min. $4.99) to pay via credit/debit card within two to three days. Or for $6.99 (flat), the payment can be made the next day.  

Here’s the freemium pricing model:

   3-to-5 day ACH >> Free for any size payment (subject to account-specific maximums)
   2-3 day debit/credit card >> 4% service fee (minimum $4.99)
   Next-day debit/credit card >> $6.99 flat-rate service fee (note 5)

_______________________________

Analysis 
_______________________________

Check’s billpay system is designed for the mobile channel. For the most part, it works. Allowing users to easily choose payment source and delivery date (including next day) is critical to making billpay valuable. Banks would be wise to use a similar design (or license from Check), to increase fee revenues. I think it’s entirely possible that billpay becomes a stand-alone profit center under this model (note 6).

That said, with three or more payment sources combined with three payment speeds, scheduling new payments can get confusing, especially trying to determine tradeoffs between speed, source and price. When I originally set up the account, it seemed relatively straightforward. But when I went back the next month, it was hard to re-engage.

The company also needs to help users choose the payment method providing the best bank for the buck (optimizing price, speed and convenience). The company recently added a pop-up box (screenshot 7) that helps. And the applicable service fee is clearly shown at every step of the process, albeit in fairly small type (screenshot 6). I understand the company needs expedited and/or card-based payments to make a profit (similar to how PayPal defaults users to bank transfers instead of credit card payments). But users need to fully understand their options throughout the process (note 7).

Long-term, the Check service is more valuable if its users become accustomed to paying all their bills from the site, even if most are free bank transfers. That way Check becomes the go-to spot for billpay, and are more likely to be remembered when users need expedited payments or a credit card charge when funds are low.  

_______________________________

Screenshots
_______________________________

#1 (left) Bills due list
#2 (right) Add a biller form

image           image 

#3 (left) Choose amount
#4 (right) Choose payment speed

  image          image


#5 (left): Choose payment source/type
#6 (right) Confirm payment screen (with fee disclosed)

image          image

#7 (left) Clicking on “?” on screen 6 launches a box with the fee schedule
#8 (right) Add credit and debit cards via scan

 image          image

——–

Notes:
1. For more details of the history of billpay pricing, see our post from 2004 and OBR #109, Pricing Online Services (subscription, Aug 2004).   
2. I have read dozens of these case studies, and I still don’t believe that anyone has proven that billpay CAUSES those results. Everything I’ve ever seen proved CORRELATION. Yes, billpay customers are more profitable and more loyal. But they would have been anyway without without subsidizing them with a costly, trouble-prone service. I still maintain that lifetime statement archives would be a better retention device, and far less expensive than free billpay (see OBR 118, Lifetime Statement Archives (subscription, June 2005).   
3. Assume Bank of America would have 5 million active billpay customers paying $5 per month x 12 months = $300 mil 
4. Hopefully, it’s only a matter of time (and a licensing deal with Mitek), before Check imports the billing statement directly into its app.
5. Due to its various payment-provider contracts, Check’s expedited payment pricing doesn’t always seem logical. For example, the company charges a flat fee of $6.99 for next-day delivery of any size payment. But for 2- to 3-day service, the charge varies by payment size (4%) with a minimum of $4.99. So, for any payment above $175, it’s cheaper to send overnight than via the slower 2- to 3-day service. On a $500 payment, that’s a savings of $13 to send overnight. To pay my current statement balance, it cost $90 to send via 2- to 3-day service or $6.99 overnight, a whopping $83 savings. And Check does not mention this when you cue up a $2,000 payment.    
6. Besides fees based on transaction speed and payment source, we also believe there are significant potential revenues from credit lines used to cover payment-account shortfalls and the newest fee-income opportunity, expedited mobile check deposits (see IngoMoney, believed to be powering Regions Bank among others).
7. In the month I’ve spent testing the service, Check has made the service fee much more transparent, so I believe they are moving in the right direction. 

Why I Want My Auto Insurance Company to Track My Every Move

imageOur family has been lucky. Extraordinarily lucky. Eighty-plus years of mostly city driving, combined across four drivers, and not a single auto insurance claim (note 1). That means we’ve paid more than $100,000 (2013 dollars) in premiums for nothing, so far (note 2).

Actually, that’s not at all fair to the insurance providers. We’ve paid $100k for the peace of mind and potential financial help had we needed it (not to mention staying on the right side of the law). And it’s been worth it.

That said, I wouldn’t mind paying less for the same peace of mind. And that’s why I love the idea of mileage- and behavioral-based insurance (note 3). I haven’t always been a model driver, but I was the first person in my extended family to regularly wear a seat belt and I’ve grown to be a relatively conservative driver, especially after becoming a parent.

And I’d love to be compensated for that.

That’s why I’m all for the next generation of “smart auto insurance” that connects to your on-board computers to measure:

  • Speed
  • Miles driven per day
  • Time of day driven
  • Acceleration
  • Braking
  • How hard turns are taken
  • Seat belt usage
  • GPS tracking

And eventually, even more difficult concepts such as:

  • Driver distraction
  • Driver impairment

Not only will I qualify for lower premiums (hopefully), the feedback from the tracker will be interesting (e.g,. historical maps of your routes) and could have a significant impact on the quality of your driving (since it will directly impact your rate).  I know there are serious big-brother concerns here, especially in light of the NSA scandals of the past few months. But it can all be opt-in, though eventually, those not opting in will face higher premiums.

Progressive Insurance is an early leader in this area. It’s opt-in Snapshot tracking device (inset) has been used by more than one million customers (see screenshot below). Prospective customers can install the device free of charge for 30 days and track their potential savings online. You don’t even have to be a Progressive customer to get the free trial. 

Bottom line: Unless regulators get in the way due to privacy concerns, it’s inevitable that auto insurance, along with other types of property/casualty, will use behavioral metrics to price the risk. That will be a big change for the industry and will likely provide good openings for new entrants. 

——————————

Progressive has 1 million drivers using its plug-in tracker (7 Aug 2013)

image

Snapshot tracking log (via RoverGuide.com here)

image

———————————-

Notes:
1. There have been a few altercations with concrete pillars and such, but nothing severe enough to involve the insurance company. 
2. I know that I’ve now completely jinxed this, sorry family, and whomever we collide with.  
3. See previous post on Street Owl’s safe driving app and Metro Mile’s pay-as-you-go insurance.
4. For more on banks opportunities in insurance, see our full report here (Dec 2011, subscription)

Op Ed: MRI Study Finds Consumer Interest in Fee-Based Bundles

by Dr. Dan Geller

Dr. Geller is EVP of Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at dan.geller@marketratesinsight.com.

——————————-

imageOne of the most significant findings from our  latest study on banking fee-revenue optimization (see note 1 below) is that the majority of consumers say they will pay monthly subscription fees for value-added financial services (see chart below and list right).

The average monthly fee that more than half (55%) of consumers are willing to pay ranges from $2.17 to $5.06 per month for each service. Of course, these stated amounts are an indication of relative perceived value rather than a pricing guide.

Furthermore, we found that consumers are willing to pay a higher overall monthly fee for the bundle than they would for each of the services individually. For example, study respondents indicated they are willing to pay $3.07 per month for a credit score report, $2.43 for account alerts and $4.27 for prepaid card for a total of $9.77. However, when the three were offered as a bundle, respondents valued them at $10.51, an 8% premium.

Bottom line: We believe there is a path for financial institutions to move customers "from free to fee" by bundling services in the optimal way.  

—————————-

Chart: Consumer Interest in Value-Added Banking Services

image 
Source: Market Rates Insight, June 2013

——————————

Note:
1. For more info on these finding, MRI is offering a free webinar on Tuesday June 18 from 2:00 PM to 3:00 PM Eastern Time. Click here to reserve your space. The full report will be available for purchase beginning June 21 at <marketratesinsight.com>.

Fees: Regions Adds Time-Based Charge to Remote Deposits

image Retail bankers, we’ve had a sighting of that very rare bird, the North American Newfee. It was thought to have gone extinct in the fall of 2011, when anti-bankers shot down the last breeding pair, a malformed $5 debit card fee at Bank of America.

But surprise. Regions Bank has gone out on a limb and put a fee on the newest banking feature to sweep the nation, remote check deposit. And the bank didn’t settle for the standard per-use fee (in trial at U.S. Bank), Regions got creative with a tiered price dependent on how fast you want the money (see note 1 for exact wording):

  • Immediate >>> 1% to 3% of check amount, with $5 minimum
  • Same night (8 pm cutoff) >>> $3 per check
  • Two days >>> $0.50 per check

There is also a potential $1 additional fee to temporarily raise your daily deposit limit to deposit a large check.

My take: I think Regions is smart to add fee(s) for the huge value mobile deposit delivers, though I think it would be better as part of a feature-laden bundle sold on a monthly subscription fee (note 2).

But tiered pricing is a novel idea worth trying. And I like the three options. But its probably too complicated for new users, at least the way it’s presented in Regions FAQ (note 3). Also confusing matters, is the extra buck for checks larger than the user’s limit. It’s asking a lot for customers to decide among three options, especially when having to decipher jargon and timing rules such as "Funds are available during posting."  

image The multi-choice pricing scheme is an example of the paradox of choice. A theory (and direct marketing rule of thumb) that says you should keep choices to a minimum otherwise recipients become overwhelmed and just give up.

I think the bank would be better off starting with just two tiers, normal and expedited. Then introducing the third tier in v2.0 next year. 

But overall, congratulations to Regions for braving the unknown to see if this newfee has wings (note 6).

———————————-

Notes:
1. Here’s how the fee is explained in the FAQ:

image

A somewhat better explanation is included on the mobile banking page:

image

2. For more info on fee-based banking services, our Online Banking Report on fee-based online services (subscription, May 2011).
3. Hopefully, the choices are better explained within the mobile user interface, which I was unable to see.
4. As expected, the initial reviews from Apple app users are harsh. Currently the bank has just a 1.5 star rating on the new version of the app containing mobile deposit. Down from 2 stars previously.  
5. Sorry for the prolonged bird metaphor. Sometimes you get bored at the keyboard (keybored?). It’s also our second bird-themed post on fees. What’s that about?
6. American Banker: http://www.americanbanker.com/issues/178_66/regions-offers-mobile-deposit-for-a-fee-1058090-1.html?

New Online Banking Report Published: Digital Overdraft Protection

clip_image002I’ve been wanting to write about overdraft protection for more than five years. It’s a $30 billion market (note 1) with a number of serious issues, but I wasn’t quite sure how it fit our mission of identifying opportunities in online and mobile banking. I finally realized the always-on digital connection to the customer fundamentally changes the overdraft equation. 

In the pre-digital age, a “bad check” was a labor-intensive process. Manually handling the item with slow snail-mail and/or phone calls to the customer was a hassle and a significant cost. The $8 NSF/OD fee in place when I started in banking (late 1980s) barely covered the variable costs, and certainly wasn’t a major profit center.

clip_image002[8]Fast-forward 25 years. With sophisticated balance forecasting ala Simple (note 3), real-time debit authorizations, and virtually free instant customer communications, not to mention a hostile political environment, the days of $30+ penalty fees are numbered.

The transition will not be an easy one for banks. But there are ways to create customer-friendly overdraft-protection services, primarily delivered digitally, that win back a good portion of the lost revenue while making customers MUCH, MUCH more satisfied.

Our new 36-page report includes:

  • 25 promising overdraft-protection enhancements for the digital age
  • Pricing overdrafts and overdraft-protection services
  • Gallery of overdraft-protection websites at banks and credit unions  
  • Profile: Bank of Internet’s OD-free checking account
  • Size of the U.S. market for overdrafts

__________________________________________________________________

About the report
__________________________________________________________________

Digital Overdraft Protection (link)
Making it a customer benefit again

Author: Jim Bruene, Editor & Founder

Published: 29 October 2012

Length: 36 pages, 12 tables, 7,600 words

Cost: No extra charge to OBR subscribers, US$395 for others here

—————————————-

Notes:
1. United States fee income to banks and credit unions
2. Graphic from Southwest Missouri Bank
3. For more on balance forecasting, see our recent PFM report (June 2012, subscription).

Bank of Internet Launches No-Overdraft-Fee Checking Account

imageI’ve been working on a blog post, “overdrafts in the digital age,” for a few days. But it’s ballooning to the point where I may turn it into a full Online Banking Report. Or just publish it in several parts here.

Either way, I’m looking for examples of new approaches to overdraft protection. For example, Bank of Internet recently did away with the fee altogether on its Rewards Checking account. The bank won’t necessarily honor the check (unless the user is covered by linked-account overdraft protection), but they won’t charge a fee if they give it the heave-ho (note 1).

The account also boasts no monthly fee, an APY up to 1.25% (if electronic transaction minimums are met), an ATM fee rebate, Intuit’s FinanceWorks PFM with Cardlytics-powered cash-back, mobile remote deposit (Mitek-powered, I presume) and Fiserv’s POPmoney P2P payments. It’s like a Finovate greatest-hits account.

————————————–

Bank of Internet homepage features Rewards Checking (27 Sep 2012)

Bank of Internet homepage featuring no-overdraft-fee checking

Rewards checking landing page (link)

BofI rewards checking landing page

———————————-

Note:
1. Bank of Internet won’t impose a fee, but the merchant who submitted the check (and who will be dinged by their bank) very likely will. So it’s not necessarily a fee-free event.
2. For info, our report on fee-based online services (subscription, May 2011)

U.S. Overdraft Revenues to Fall 50% by 2014

image Yes, that headline is pure fiction. 

No one can predict the fallout from the bank-bashing, CFPB-loving, election-year-posturing in 2012. But realistically, overdraft charges are about 100x more important to consumers than debit-card interchange, so it’s an area that will be debated in the months and years to come.   

While I’m not predicting Durbin-like NSF/OD price controls, there is a material probability that it could happen. And even if the U.S. government steers clear of explicit price controls, we’ve likely seen the peak of OD/NSF income. So here’s my take:

Best case: Real NSF fees drift slowly downward as penalty fees/pricing become more transparent through technology and various regulatory initiatives.

Worst case: See headline above

_________________________________________________________

Action items
__________________________________________________________________

Hopefully, rising rates, higher home prices, and a healthier lending environment will provide enough revenue to overcome any declines in OD/NSF income. However, those macro factors are completely out of your hands. If you want to control your own destiny, I suggest you consider the following:

  • More overdraft protection credit lines: A credit line with a 12% to 18% APY (depending on credit score), paired with a $3 flat OD transfer fee, can be a very lucrative product. And it’s win-win. Instead of hammering consumers with a massive penalty fee, you entrust them to pay it back when they see fit.
  • Fees for value-added services: It’s not going to be easy charging fees for online/mobile services. But you are a business facing difficult choices in how to grow revenues, and subscription fees for new, value-added services are promising. 
  • image Insurance products: This is a huge, growing market that is relatively untapped by retail banks and credit unions. And distribution has yet to be moved to the online/mobile channel. So there is a huge opportunity for banks to be the ones to do that. At FinovateSpring, I was impressed by a startup, CoverHound, that has really interesting ideas on how to put a much-needed Web 2.0 spin to the product (demo here). We explored this in great detail in a December report. We also moved it to the number 1 priority for 2012 in our January report (note 2).
  • Offers and lead generation: Major banks already book major revenues through various third-party programs, such as credit monitoring, auto insurance, and statement inserts. The latest idea, which has attracted more than $200 million in venture capital, is tying merchant discounts and offers to credit and debit cards (note 3).
  • Branch right-sizing: I’m not saying that branches must go away, rather that the good ones morph into smaller, more efficient financial stores, with a big emphasis on small business, lending and yes, you guessed it, insurance. 

——————————

Notes:
1. The neighbor test: Would you rather explain to your neighbor why you charged their daughter $36 for buying one too many lattes on their debit card, or would you rather tell them about your $3/mo “oops” service that warns parents when their child is about to do something stupid with their money. We write about value-added fees all the time in Netbanker, but the last full report is here (May 2011, subscription).
2. For more on banks offering insurance, see our full report here (Dec 2011, subscription)
2. For more on card-linked offers, see our full report here (Feb. 2011, subscription).