Christopher Leonard Nov 27, 2011

Community Banking’s Lucky Break

The mid-first century AD Roman philosopher Seneca said that “luck is what happens when preparation meets opportunity.” I posit that, in today’s banking environment, this auspicious equation can be rearranged to say that opportunity exists where luck meets preparation.

Financial institutions with less than $10 billion in assets have been handed some good fortune that may never come again. I am speaking, of course, of the Durbin Amendment, which reduced debit card interchange income for banks over $10 billion in assets. The result has been to throw those larger banks into turmoil as they have been forced to raise fees to recover some of that lost fee income – leaving community banks and credit unions to pick up the disaffected customers.

Trouble is, a new presidential administration and Congress could repeal the Durbin Amendment with the stroke of a pen. If this happens, the current lucky break for smaller banks and credit unions will vanish, so they would be well advised to seize this opportunity by aggressively pursuing new checking relationships.

Clearly, the advantage the Durbin Amendment gives smaller financial institutions is that they can better afford to continue to offer free checking, thus providing a banking relationship that is seen as more consumer-friendly. In my work, though, I am seeing precious few community financial institutions really taking advantage of this opportunity. While many are reporting increased account openings, they are more passive recipients than active seekers of these accounts. They should heed Seneca, who also said, “If one does not know to which port one is sailing, no wind is favorable.” It is time for smaller institutions to point the sail in the right direction and capture the wind that is consumer anger at large banks. Right now, many of them are not even in the boat, much less pointing it in the right direction.

Timing is everything, and this article would have been stronger if I could have pointed to Bank of America’s $5 debit card fee debacle as an example of why consumers are angry with larger institutions. However, every mega-bank I am aware of (including Bank of America) has recanted its intentions to implement significant debit card fees. Some community institutions think this means they have lost a great weapon in the war to differentiate themselves from the big banks. I disagree. Consumer disenchantment is still very prevalent, as evidenced by the tens of thousands of accounts moved on November 5, 2011, the so-called “Bank Transfer Day,” which occurred after Bank of America had retracted its debit card fee.

Even if it’s not a debit card fee or a monthly account fee, the mega-banks are going to have to impose some kind of fee to make up for lost interchange revenue – and consumers know it. For example, I had accounts at Wachovia Corp. for my children that for years were free because of a loan I had with the bank. Immediately after the conversion of Wachovia to Wells Fargo & Co., I noticed check image fees started popping up on these accounts, despite the fact that there have been no checks written on those accounts for years, meaning that I’m paying the bank for the privilege of receiving check images they’ll never need to send. While I understand that the bank needs to make money, the average consumer who transacts 100% with a debit card or ACH drafts sees this charge and probably thinks, “Why am I getting charged for something I’m not even getting?!?” Not exactly a warm welcome to Wells Fargo for the former Wachovia customers.

So, what can smaller financial institutions do to take advantage of their lucky break?

Capitalize on Referrals. Consumers are talking more today about their banking frustrations than at any other time in recent memory. You need to remind your customers or members that if they are happy with you, they should refer a friend because you offer great service and still provide free checking. Have your front-line staff hand out a tell-a-friend coupon with every transaction; they’re already handing over a receipt, so putting one more piece of paper with it is a no-brainer. And, since your tellers are going to say something like, “Have a nice day” at the end of each transaction, why not say instead, “We’d love it if you would refer a friend to us!”

Mean It! It’s easy to say that you have great service and you still offer free checking, but you need to mean it! Just the absence of mega-bank status will help you only so much. You have got to execute and get your front-line staff to be as energized about the current market opportunity as you are and let that enthusiasm show in how employees go out of their way to make new account holders feel welcome. And if you’re even thinking about abandoning free checking, consider the cautionary tale in TCF Financial Corp.’s loss of 250,000 checking accounts within the first six months after ending free checking.

Make It Easy. Please don’t make your account opening process seem as hard to the new account holder as taking out a loan. While we’d love to think that we can easily route new customers to a friendly website that makes it easy to open a new account from the sofa, our own data and experience show that the world is not there yet. A very small percentage of accounts at community banks are actually opened online. The consumer wants the personal touch of a friendly human being who makes opening a checking account painless. Rethink your opening processes from the consumer’s perspective and make the whole transaction take well under 10 minutes. After all, didn’t you hate it the first time you went to Blockbuster in the old days and all you wanted to do was rent a movie but you spent 20 minutes signing up for the stupid membership card? Even though you understand there are complexities in opening a checking account, the average consumer doesn’t, and you don’t want the same fate as Blockbuster.

Consider Direct Mail Again. Direct mail for account acquisition during the past five to 10 years was not as powerful as it could have been because there was no real impetus driving consumers to switch financial institutions. That has changed over the last few months. We think response rates on direct mail for account acquisition could rebound enough to make this worth your while , especially when coupled with a “We’re Still Free” message and a reward for making the switch. Through better data, marketing tools also have become more effective at targeting the desired demographics for profitable account holders, resulting in a better return on investment for such campaigns.

Activate Your Current Account Base. Our data shows that at a typical community bank or credit union, up to 40% of checking account holders are not actively using the institution’s debit card. A lot of people have opened an account with you but are not actively using your plastic and therefore are not actively using their account. Isn’t it a lot cheaper to get your current account holders to start using their account than it is to market in the dark to get new accounts? With some analysis, you can figure out which account holders are not actively using their account and selectively market to that group with offers designed to get them to begin using you as their primary financial institution and truly onboard them (and their corresponding fee income).

The final Seneca quote: “A large part of mankind is angry not with the sins but with the sinners.” There are plenty of consumers out there who are angry with the perceived “sinners” in banking, and it is time to turn your good luck into opportunity by meeting it with some solid preparation and hard work.

Mr. Leonard is chief operating officer and general counsel for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of fee income enhancement, checking account acquisition and overdraft management strategies to community and regional banks and credit unions. He can be reached at


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