Rick Barham Feb 20, 2015

Time to raise minimum deposits

Ahead of any rise in interest rates, financial institutions continue to hunt for new revenue sources, first from retail fees and second by increasing minimum deposits on time accounts. It’s time to consider flipping those priorities and focusing on raising deposit minimums to make up for shortfalls in fee revenue.

Industry-wide, fee income has been trending down, especially since the Consumer Financial Protection Bureau (CFPB) started questioning the fees that banks charge. Meanwhile, there has been ongoing backlash from consumers who are rejecting fee-based checking and bank services. Ever since 2011, when Bank of America attempted to charge $5 per-month for debit, depositors have been resistant to pay bank fees, especially when they can access alternatives to checking such as prepaid bank cards and e-wallet services.

To put this in perspective, the CFPB reports that overdraft (OD) and non-sufficient funds (NSF) fees constitute the majority of the total checking account fees that consumers incur (71.9% and 18.9% respectively). Further, Bretton Woods consultancy and George Mason University together report that community banks depend more heavily on revenues from overdraft protection than bigger banks, with overdraft fees generating 27% of bank income at smaller banks and 12% at larger banks.   

To assess where retail fees are headed, we decided to take a closer look at NSF and OD fees. We used a national sampling drawing from our national retail fees database for benchmarking banks and credit unions.

We saw some interesting changes from last December to this January. On a national level, bank OD fees took the biggest hit, down 0.9% compared to a fall of 0.1% for NSF. Banks are clearly feeling the pressure from both customers and the CFPB and are responding accordingly.

In searching for possible offsets to higher fees, we noted that Memphis-based First Tennessee Bank is reportedly testing imposing higher balances in customer accounts in lieu of higher fees. To ascertain whether this is a trend, we explored national minimum balances by product types. Sure enough, balances on term accounts jumped 15.45% between December 2014 and this January while those on more liquid accounts, checking account and money market, fell 7.64% and 6.85% respectively. This makes sense in the face of anticipated rising interest rates.

In this regulatory environment, it’s clear that financial institutions can’t sacrifice customer satisfaction for the sake of fee revenue. It’s time the banking industry stopped relying on NSF and OD fees and started looking elsewhere for new revenue sources, such as raising minimum balance requirements. Competition for deposits is going to become fierce again once rates start to rise. Accumulating deposits now will lay the foundation for future profits.

It’s a better strategy to place the onus on customers to maintain a higher minimum balance and leverage those larger deposits acquired, either now or in the future, rather than letting those customers overdraw their accounts to penalize them with NSF or OD fees.

Mr. Barham is CEO and founder of San Anselmo, Calif.-based Market Rates Insight, which provides competitive pricing intelligence for deposits, loans and fees to financial institutions nationwide. He can be reached at Rick.Barham@MarketRatesInsight.com.

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