A recent article in BAI Banking Strategies entitled Re-pricing Checking Accounts for Growth by Bob Giltner suggested that “add-on pricing, not bundled into products but as stand-alone units … will increase revenues to more than offset any lost income … Under this approach, the customer can pick and choose which services to add on to the very basic, free package, and pay for those services accordingly.”
This sounds good, “commonsense-ical” and customer-centric. Here’s the problem though: it doesn’t work. For years, banks have been offering add-on products for a fee to complement a free or basic checking account. While one-third of consumers might say they are willing to pay for premium add-on services as the article states, actual sale rates of these add-on services are anemic, averaging about 2% and topping no more than 4%, according to my firm’s analysis of millions of accounts in consumer checking portfolios of hundreds of banks and credit unions over the last ten years.
We have identified two main reasons for this lack of sales performance: First, after having made the primary decision regarding the demand deposit account (DDA) product they want to receive, customers aren’t typically motivated to make another buy decision or very receptive to hearing a pitch for an add-on product. Second, branch bankers usually make a half-hearted attempt to sell these add-on services – if they make the attempt at all. We know this from thousands of mystery-shop experiences.
Sure, there are other industries that have had success with add-on premium service pricing. But you need to be careful of apples-to-oranges comparisons between banks and cable companies, cell phone companies and internet providers. For one thing, the products of these other industries come with a basic fee; they’re not added to a free service. The customer in that scenario has already chosen to spend money for the basic service, which psychologically clears the way for considering an upgrade for just a small monthly additional fee. Plus, the add-on services that financial institutions can naturally provide aren’t usually as intrinsically appealing to consumers as more TV channels, unlimited texting or super fast connection speeds. Checking account benefits just don’t get the consumer’s heart racing to the same degree.
Pay for Value
Now, let’s assume you don’t believe anything I’ve written so far and still insist on the revenue-generating power of add-on premium service pricing on checking accounts. This begs the question, “What is the price?” Here’s what the Giltner article says: “The math shows that offering many new premium services, even when only 15% to 30% of consumers sign up for a specific service, can generate new revenue equal to an average of $100 for every DDA in the institution.”
Okay, let’s do the math. If 30% of consumers, the high end of the range shown, signs up for a specific service and we conservatively assume that checking customers represent all of the bank’s deposit-based customers, those customers who bought the extra services would be paying annually, on average, $333 for those services in order to generate an average of $100 for every DDA. Perhaps in the glory days of automatic overdraft programs this could be possible, but those days are over and aren’t going to return!
There isn’t a bank in America that has done that or could possibly yield that kind of sales rate at this pricing level. If they could, every bank would be offering add-on services for new revenue generation. The more realistic projection is that 2% of checking customers might pay for an add-on service at $5 to $7 per month, yielding an average of about $1.50 in new revenue per DDA. The only add-on service that yields higher sell-through and thus more revenue is insurance.
I do agree with one idea put forth in Giltner’s article: that requiring customers to pay for premium services (i.e., “paying fees”) will not run them off. By “paying fees” I don’t mean a penalty fee for not meeting an account requirement (like a minimum balance). Research done by Raddon Financial Group and others suggests there is increased attrition risk in imposing such penalty fees (up to 45%). Nor am I referring to asking customers to pay fees with no commensurate value in the customer’s mind, like a check card or other traditional checking-related service that has been given away for free for the last decade or so. If you want customer attrition, especially with your profitable customers, start doing that.
What I do mean is that customers will willingly “pay fees” when they receive, in their mind, a fair exchange of value for that fee. Earlier this year, Russell Herder, a Minnesota based marketing research company, conducted a survey of more than 500 United States bank and credit union checking and savings account customers to ascertain if, and to what degree, loyalty to their financial institution is impacted by service fees. The bottom line, according to the survey: “The belief that a particular bank fee is unfair has a much stronger impact on consumer sentiment than the fee itself. In fact, as long as charges are perceived to be fairly assessed, the research showed no negative impact on consumer sentiment whatsoever.”
And that’s what banks should be focused on when it comes to fees – perceived fairness by their customers. That was the point of my own recent BAI Banking Strategies article From Free to Fee Checking at Fair Value. Using fairness as your reference point in DDA product design and pricing will get you sizeable financial return in the form of new revenue from both existing customers, unprofitable and profitable, and new customers – about $60 to $75 annually per fee-based DDA with sales rates around 40%.
You won’t get that with an explicit, premium pricing add-on sales model. If you have experienced success with such a model, please contact me so you can change my mind!
Mr. Branton is a managing partner with Nashville-based StrategyCorps. He can be reached at firstname.lastname@example.org.
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