Banks can generate nearly double the potential $875 million in monthly debit card fees just by lowering their deposit rates by as little as 0.01% a month. The $875 million figure is arrived at by calculating the total potential for debit card fees if each of the 175 million U.S. adults with bank accounts pays $5 per month. A decrease of 0.01% in the current national average deposit interest rate reduces interest expense for banks nationally by about $1.5 billion a month, which impacts the bottom line in the same way as earning this amount through fees.
In 2010, interest expense on deposits at FDIC-insured banks was $107 billion, or an average of $9.2 billion per month, compared with an average $7.7 billion as of June of this year – a decrease of $1.5 billion a month in average interest expense. The national average interest rate for deposits was 0.80% at the end of 2010 and 0.74% in June of this year – a decrease of 0.06% in six months or an average decrease of 0.01% per month. Thus, maintaining the “normal” decrease of 0.01% per month reduces interest expense nationally by $1.5 billion per month, which is nearly twice as much as the total potential income from the $5 debit-card fee if every bank account holder had to pay it.
Will customers react to a slight decrease in deposit rates as they did in the debit fee controversy? Not likely. The refining of deposit rates to the tune of 0.01% a month without adversely impacting deposit balances is possible just by applying higher levels of pricing precision and analytics to avoid deposit mispricing. The leading cause of deposit mispricing is the inability to identify various types of CDs (beyond term and tier) when establishing a rate, meaning a rate is established based on competitive information without the corresponding type of CD next to the annual percentage yield (APY). The APY variance between a regular CD and other CD types, such as the callable CD, can be as much as 39 basis point (bps). Thus, if a rate is set not knowing the type of competing CD, an over pricing of up to 39 bps can occur.
By improving their pricing precision and analytics, banks can maintain a healthy net interest margin and protect their bottom line during the next two to three years until the economy recovers. Better yet, this objective can be achieved with minimal effort and, most importantly, without alienating customers.
Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, where he oversees the research and analytics services of the company. He can be reached at [email protected].
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