Banks need to get creative when it comes to the most basic of products — the checking account — if they hope to offset the huge losses they will experience down the road.

“We’re at an inflection point in the checking business,” said Sherief Meleis, managing director of New York–based Novantas LLC. Noting that about half of checking accounts are unprofitable in a “good year,” Meleis said coming regulatory and business environment changes could hike that percentage to 75%.

Meleis made his remarks on February 23 at the BAI TransPay Conference & Expo in San Diego, Calif., during a session entitled “DDA Performance Outlook.” He advised banks to come up with new activation and retention strategies to keep checking customers engaged and value-added products and services to give them a reason to pay fees.

Meleis pointed out that low usage and lack of interest in other revenue-producing products and services hinder checking account profitability. For “dead on arrival” accounts, which are opened but hardly ever used, he suggested that banks promote online bill pay and sales incentives based on the accounts’ value to the bank. For “living dead” accounts, which are potentially profitable but insufficiently active, he recommended reactivation incentives such as overdraft rebates.

In the long term, Meleis encouraged banks to restructure and re–price their checking products “to make more sense for the bank.” Specifically, he recommended appealing to discreet customer segments based on their deposit, service, and payment behaviors.

For example, Meleis said, a bank could offer a specific checking product to online banking users who receive ACH deposits and use their debit card frequently at the point–of–sale frequently. He cited the Virtual Wallet online personal financial management offering by Pittsburgh’s PNC Financial Services Group, Inc., which appeals to Generation Y customers in particular and offers a springboard to other fee–based products and services.

Meleis said such innovation is required because of numerous “headwinds” now pushing against checking’s status quo. Among those are the on–going financial crisis and rising joblessness, which are causing consumers to be more careful about avoiding fees. At the same time, he said, the current rate environment is lowering net interest rate margins, making it more difficult for banks to make money on the spread.

Finally, and perhaps most fundamentally, new regulations aimed at giving consumers the opportunity to selectively opt out of checking account fees could torpedo banks’ healthy income from non–sufficient funds (NSF) and overdraft fees, Meleis said. According to Novantas’s research, U.S. banks make about $25 billion annually from these fees.

“Three percent of bank customers have been creating three–quarters of those fees,” he added. “It’s not sustainable.”

Meleis cited “free checking,” the fee–less deposit account, as particularly endangered in this environment. “Free checking is broken,” he said. “The way banks made money on free checking was on non–sufficient funds and overdraft fees. They didn’t charge for transactions and branches.”

Overall, banks made 39% of their depository revenues from checking fees and net-interest margin in 2008 — a disproportionately big slice of the pie considering that checking account deposits represent only $549 billion of the industry's more than $6 trillion in overall deposits, according to regulatory data cited by Meleis.

 (For more on the changing economics of the checking account, see “Sweeping Away Free Checking?” in the January/February 2009 issue of BAI Banking Strategies and “Meeting the Energy Crisis in Deposits” in the November/December 2008 issue. Also see “A Checking Account by Any Other Name?” in the November 14, 2007 issue of BAI Banking Strategies Retail Delivery Insights.)

More Articles in This Issue

» PREPAID CARDS: KILLER APP FOR THE UNBANKED?
Banks can better tap the unbanked market by targeting creditworthy consumers through the use of prepaid debit cards, according to consultants from Edgar, Dunn & Co.  »more

» FROM THE BAI COMMUNITY
With a number of large institutions merging, there may be some turnkey branches for sale. Some of these branch locations may represent great opportunities to expand your network at a relative bargain price. Yet, while it might be hard to fight the “you–have–to–buy–it, it’s–on–sale” mentality, my skeptical nature says: buyer beware.  »more

» BAI Home
» BAI Banking Strategies Online
» BAI Conferences & Events
» BAI Education & Training
» BAI Research & Benchmarking
» Resource Directory