The CommunityBanker 8 The NSF Dilemma We knew it couldn’t continue, but we kept hoping. The NSF drug that propped up the profitability of so many retail franchises for decades is about to expire. For ages, the product itself has been in high demand by specific customer segments. It is, per se, a product that meets the needs of those customers. The problems arose not from the product itself but a combination of two factors: • Banks using NSF fees, features and functionality that were price elastic to improve profitability and increase customer usage of the product; and • Customers found that incurring NSF fees was less expensive than other ways of borrowing short-term funds; or, for another high-usage segment, the product was convenient at any price. As customer demand rose, so did the fees, and the behind-the-scenes machinations to incur them. A consulting cottage industry sprouted, helping banks maximize fees through “tweaking the matrix” (in the best interest of high-usage customers, of course). This combination was the precursor to the end of the NSF fee. Online banks, which enjoy a fundamentally different cost structure, were looking for ways to gather deposits. One of them realized that the NSF fee could become an inhibitor for SOME prospects to open an account with the bank. In a stroke of wisdom, that bank announced the elimination of NSF fees. It was an easy decision since these fees were not very significant in their operating model. This change was waived off as an aberration by many traditional banks, where NSF fees are a major component of retail profitability. Those banks that invested heavily in branches and other complex retail services found these fees central to funding R&D initiatives in the retail space, as well as improving that line-of-business performance during nearly a decade of exceptionally low rates. And then came Chase … and PNC … and Frost …
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