Academic journal article ABA Banking Journal

How to Handle Fees? Very Carefully

Academic journal article ABA Banking Journal

How to Handle Fees? Very Carefully

Article excerpt

To fee or not to fee. That is the question on bankers' minds nationwide. Fees are sending the media, legislators, and consumer-advocate groups into a feeding frenzy and the banking industry is the luckless meal. Banks, hit in a crossfire of accusations and name-calling, are struggling to uphold a decent public image, serve their customers in a fair manner, and, at the same time, make the necessary buck--a far from easy task.

In spite of the public-relations challenge, a series of other factors--the deregulation of financial services, the encroachment of nonbanks, shrinking interest margins, and the expense of brick and mortar--have made fees a necessary, and justifiable, source of income for banks as well as a prime motivator in moving customers towards less expensive (for banks) and more convenient (for customers) channels. In addition, the importance of fee income shows no sign of diminishing--last year bank revenue from fees comprised 21.4% of the total revenue at commercial banks as compared to 14.7% of the total revenue in 1990, according to the FDIC. That number includes not only service charges on retail accounts, but business checking fees, and noninterest income from such operations as trust, mortgage, lending, and investment sales.

Two factors come into play as bankers attempt find their balance on the service-charge tightrope: Fees help to increase the overall profitability of the institution. Fee-sensitive customers, however, must be given due respect and good value for their money.

How to find the right balance?

"Therein lies the rub," says Charles S. Forbes, a principal at Earnings Performance Group, Short Hills, N.J.

It's not easy being first

First National Bank of Chicago is no stranger to the "rub" that Forbes mentions. Its story has become so well known, the bank could very well be the poster child for banks in need of good publicity.

In April 1995 First Chicago announced a new fee schedule for its retail services that made headlines across the nation. One of the accounts the bank had introduced, the self-service account, boasted no minimum balance requirements, no monthly fees, unlimited free use of First Chicago's ATMs, and eight free uses of other banks' ATMs if the customer had direct deposit. The ensuing outcry was provoked, however, by a $3 fee customers were charged for most teller-assisted transactions. Some teller services remained free: asking questions, resolving problems on a statement, and buying travelers checks or money orders.

First Chicago's competitors and consumer groups leapt at the opportunity to denounce the bank. Signs appeared in windows of rival banks boasting no charge for using a teller. Radio spots poked fun at "that big bank" that charged customers a $3 fee for asking a teller a question, any question--which was not in fact true. Unhappy customers demanded an explanation. First Chicago admits to a few missteps that added fuel to the firestorm. The bank introduced its new lineup by sending letters to customers notifying them they had been placed into an account considered appropriate for them. "We didn't say, 'Here are the new products, now you can go pick,'" says Robin Foote, head of retail marketing; although she adds customers did have the option to switch accounts if they weren't satisfied with the one the bank had chosen for them.

Recently, First Chicago added a new, more traditional product to its lineup with a higher minimum balance requirement and no teller fee. The product is aimed at customers of Detroit's NBD Corp., which merged with First Chicago on Nov. 30. "We are doing things differently now. No one will automatically be converted to a product line with a teller fee, yet it is available to them if they want it," says Foote. "So now the market has been pretty quiet."

In addition, customers placed in the accounts introduced in April 1995 were charged $1.50 for exceeding the ATM limit and $3 for exceeding the teller limit. …

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