Sean C. Payant Feb 28, 2011

Why Community Banks Need a Product Advantage

One of the most common concerns we encounter today from community banks is how to replace lost fee income. Basically, bankers want to know how they can begin charging for what has previously been free.

Our question back to them is: What makes you think you can? Or that you should even try?

Bankers by their very nature love fees. After Bank of America Corp. recently introduced some new checking account fees in three pilot states, Joe L. Price, president of consumer and small business banking, was quoted in the Wall Street Journal as saying the fees provide customers with more “choices.”

Actually, the evidence seems to indicate that consumers hate fees. Research – from 30 years ago and from three months ago – indicates they also hate minimum balance requirements and confusing products and services. Customers want simple products and services. Citibank, for example, got rave reviews on the new retail products they unveiled recently. The interesting thing was that nobody claimed they were great products; the positive comments focused on the fact that the products were simple.

New regulations and guidance without clarity are encouraging many community bank leaders to abandon free checking in an attempt to copy the “big banks.” They are moving toward charging fees and complicating product and service offerings with too many variables and too many “requirements” for customers to follow.

During a recent meeting with a new client, the discussion centered on the challenges of lost income and the desire to replace it. To answer them, I took them through the following exercise and let the management team draw their own conclusions. Case studies can be powerful teaching tools, so let’s do this one together. We will compare your community bank to – well, why not? – Bank of America. Since customer perception is reality, we will have to draw some conclusions based on what customers are likely to think (e.g., their assumptions):

  • Location

The number one reason that customers choose a bank is still location, which translates to convenience. The average community bank in the United States has six locations. Bank of America has more than 6,200. Given the importance of convenience to consumer banking, this is a huge advantage to the large banks.

  • Marketing Dollars

Do we even have to discuss who wins here? Bank of America can buy a Super Bowl ad if they want!

  • Product Offerings

We already established that customer perception is reality. How do you think a typical potential customer would respond to the following question: “Which has more products and services? Bank of America or your bank?”

Most people would cite Bank of America simply because of perception. The reality is that most community banks can provide nearly everything the vast majority of consumers and businesses need to meet their financial services needs! Because perception is against them, however, community banks absolutely can’t get sucked into thinking that their core products can match those of the big banks.

  • Pricing on Deposits

Let’s go back out on the street and ask one more question: “Who pays higher interest rates on deposits – Bank of America or your bank?” A few astute consumers or businesses may credit your bank but I would argue that the perception is overwhelmingly in favor of Bank of America. In reality, almost every one of our clients across the United States pays better rates on deposits than the big banks.

  • Too Big to Fail?

During the crisis, no big bank was allowed to fail. Nearly every Friday for the last two years at least one community bank has been closed. Who do you think consumers perceive as more stable?

  • Customer Culture

All things considered, who has the ability to most fully know their customers and service their consumer and business needs – Bank of American or your bank? This is an area in which your bank wins hands down if – and only if – you treat culture as a differentiator.

Bottom line: if consumers have to pay $4.95 per month for a checking account at Bank of America or $4.95 per month for a checking account at your bank, which will they pick? If you didn’t say Bank of America, you are fooling yourself.

Community banks operate a completely different pricing model than the big banks, which have significantly more consumer and business customers – three or more times as many on average. If a big bank drives off 1,000 customers because of fees, they are still in business. A community bank that does that is out of business.

The result is that community bankers must dangle a compelling offer, such as free checking, to bring in people. And they must spend their marking dollars with regard to their return on investment. Buying a Super Bowl commercial would be a waste of money for a community bank, even if it were possible, since their branch network would not be convenient enough to the vast majority of viewers.

Since convenience is the primary selection criteria for customers, we should be “shooting where the ducks are flying,” which means focusing on the proximity of your branches for new retail and business customers in your specific market area, i.e., “local presence.” Once you’ve attracted those customers, you can use service as a differentiator to maximize your share of wallet through added relationships and a strategic approach to cross-selling additional products and services.

How will community banks replace lost fee income? In reality, it is unlikely that any community bank can actually make up all of the potential lost revenue with its existing customer base. The numbers are stacked against them. If you start charging for checking accounts, you will ultimately drive good customers to banks with more locations and all of the other perceived advantages discussed above.

The best way for a community bank to make up the lost fee income is to grow their customer base. Nearly every community bank branch in the United States has excess capacity. They could double their customer base and still not need to add staff. And the key to growing customers is to lead with a product, such as free checking, that is good for customers, simple and logical, easy to sell and easier to buy, and yes, that makes money for the bank.

Community banks that follow the lead of the big banks will lose! The big guys have too many advantages – some real and some perceived. Community banks need to play the game on their own terms, which means leading with simple products and services.

Mr. Payant is the executive vice president of Consulting Services for Lincoln, Neb.-based Haberfeld Associates, which provides customer acquisition services for financial institutions. He can be reached at

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