Let’s face it, consumers are not rational in their purchase and use of checking accounts. Instead, they make decisions affected by their emotional needs, particularly concerning simplicity, acceptance and immediate gratification.
While some of us may not find it surprising that emotions drive consumer behavior in addition to logic, it appears that many retail bank executives developing new demand deposit account (DDA) pricing and product packages show little understanding of this concept. They see consumers as rational, relationship-driven beings, carefully calculating metrics, balancing account deposits, activity and fees. Yet, behavioral economists, such as Harvard-based Sendhil Mullainathan, show that economic models based on rational behavior are often in error. One of his studies demonstrated that consumers purchased loans with a higher interest cost when the loan offer included a smiling female face. Such behavioral economics have become part of the rallying cry for regulatory initiatives to protect consumers from themselves.
For the past 20 years and as recently as 2010, research has shown that the most important factor for the largest segment of consumers in selecting a checking account is not the way it’s priced or even its features. Simply, it is the convenience and proximity of a branch to the prospect seeking to open a checking account. In addition, research shows that the reason most consumers change service providers isn’t for better value or improved features, but they’ve become upset with the service and treatment received from their current provider.
In selecting accounts, simplicity wins the day over accounts that offer clever names, packages of services with two or three asterisks relating to how costs are incurred or avoided. In paying fees, consumers abhor monthly maintenance fees of any type, no matter how “fair” or rational. Research also shows that ending “free checking” angers consumers to the point that they will switch financial institutions.
Offering “free checking” should not be confused with losing fee revenue. Most of the fees consumers pay today for financial services are implicit fees or fees driven by a consumer’s behavior, regardless of the type of account and its features. For example, many consumers pay tens to hundreds of dollars in checking fees per year for overdraft services, foreign ATM fees or interchange with no emotional discomfort. Even after Regulation E’s changes requiring an opt-in for overdraft fees on everyday debit card and ATM transactions, nearly all of the people paying overdraft fees opted in to continue paying them.
Of course, some consumers are upset with some fee types and express that anger in complaints and by changing providers. The point is that consumers who do pay fees do so not based on rational calculations but because they tend not to find the fees emotionally upsetting.
So, what is the financial institution (FI) value proposition for an “implicit usage” pricing model? Such a model bases fees on a specific customer’s emotional willingness to pay. Those unwilling to pay can avoid fees altogether, leaving the majority of fees to be driven by your heavy users. This is the group who is more likely to bring in additional banking relationships and stay with your FI longer. Overall, such a model should drive relationships, retention and revenues.
That’s the theory. But how can “implicit usage” pricing according to emotional willingness be implemented? One example can be found in prepaid cards, which generate the largest component of their fees (an average of $20 plus per month) from deposit services called “loading.” Many consumers are quite willing to pay an ad hoc fee to be able to deposit funds at a variety of outlets at any time with immediate availability of spendable funds.
Another option is to make fee rebates available for a myriad of options and redeemable rather than hard-coded. In this way, those consumers wanting the rebate can receive it, while those not emotionally interested in fee rebates can pass. For example, many financial institutions today offer to rebate foreign ATM fees. However, they do not automatically code the rebate in their systems but instead ask the account holder to redeem the fee rebate by providing ATM receipts. Those customers who are emotionally upset by the fee can redeem and receive the rebate to their satisfaction while the financial institution avoids the cost of the rebate to consumers who are not concerned about the foreign ATM fee. As a result, the financial institution can offer lower fees to all by leveraging the low “emotional willingness to seek a refund” of others.
Implicit fees based on customer usage and behavior rather than “one-size-fits-all” fees charged on every account are more accepted by the market and have public policy benefits. It allows those most sensitive to fees to avoid them while those who pay fees or forego the redemption of fees to do so at their own volition. Strategies that offer services based on a customer’s “emotional willingness to pay” will drive revenue, relationships and customer satisfaction.
Mr. Giltner is Chief DDA Strategist for Wilmington, N.C.-based Velocity Solutions, Inc., a provider of profit strategies to community and regional banks and credit unions. He can be reached at firstname.lastname@example.org.