40 SEPTEMBER / OCTOBER 2018 Sean C. Payant, Ph.D. Chief Consulting Officer Haberfeld Associates sean@haberfeld.com DIRECTORS / SENIOR MANAGEMENT Over the last 10 years, the banking industry has seen a steady decline in fee income associated with checking accounts. Community banks under $10 billion have seen a 32 percent decline, and banks over $10 billion have seen a 45 percent decline in fee income when compared to a 2008 baseline. Many institutions are raising fees. Should you? One option is to start adding minimum balances in order to get additional income from your current customers. Some community banks, however, have tried to make up fee income by instituting additional account fees, with disappointing results. This is not isolated to the banking industry. Other retailers and business have tried this approach. Case in point: Several years ago, Starbucks Coffee Company ran a test through which it required a minimum purchase in the drive-through to encourage those wanting a $1.85 cup of coffee to come into the store. Less than one month later, the pilot test ended abruptly. What Starbucks knows is that when customers come into the store, they will spend more. Creating a minimum purchase requirement, though, was not the solution, as it upset customers and hurt the Starbucks image in those markets. As community bankers, we need to look through the lens of the prospective customer. One of the primary reasons consumers switch banking providers is to eliminate monthly checking account service charges. The majority of consumers still do not want to pay for a checking account. Price matters. In 2010, prior to the implementation of the DoddFrank Act changes related to retail debit cards and overdrafts services, an extremely profitable midsized bank located in the northwest decided to implement a $9 per month service fee on checking accounts. Its fee income dropped dramatically, and attrition went up substantially. Ultimately, in a public statement, the CEO admitted that the bank made a mistake, but much of the damage was already done. If monthly service charges aren’t the answer, then what is? Understand Capacity Understanding capacity is one of the biggest challenges in the banking industry. Banks have high fixed costs and low marginal costs. Each branch is an expensive “factory” that is running at 15 percent to 40 percent capacity – or 50 percent, if they’re lucky. The typical community institution averages 1,000 to 1,200 core relationships per branch, while large banks average 3,000 to 5,000 per branch. If you have factories running at 30 percent capacity, your primary objective should be to fill the excess capacity by serving more customers. Client data shows marginal expenses (core processor, account servicing, etc.) for the next core customer are approximately $30 to $50 per year, and each new core customer generates approximately $300 to $500 in revenue per year. Excess capacity allows us to look at Increasing Fee Income Without raising fees Haberfeld Associates is an associate member of the Indiana Bankers Association.
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