New Revenue Math
Smith, Alan, Independent Banker
Calculations in tackling the fee income conundrum
Technological advances have led to dramatic improvements in commercial and consumer banking services- balance transfers, account opening, statement viewing and bill payment. Tasks that used to take hours now take minutes. Services have improved tenfold, yet remarkably, most services still remain free for the majority of banking customers.
At the same time, legislative changes and regulatory responses are compromising the profitability of deposit customers, specifically the free-account customers. With interest rates and loan demand at anemic levels, demand deposit balances are not as valuable as when loan demand and rates were higher.
Your community bank can consider taking steps to offset the negative effect of these changes. Start by reconsidering the concept of "free" and find ways to improve fee income.
Review relationships and costs. Analyze your community bank's deposit customer base in terms of product relationships and fee income opportunities. Create a list of all checking account customers and determine what other services, such as debit card, savings and loan products, they use. Group accounts according to combinations of fee-generating services or activities, such as free checking only, free checking plus online access with bill pay, free checking plus savings, free checking plus lending, and free checking and other product combinations.
Define relationship grades like loan grades (pass, watch, special mention and so on) to establish customer value. Focus first on customers who have only free accounts and services. For example, a free account with an average balance of $200-assuming a 4 percent margin-would generate $8 a year in a soft benefit to your community bank. So for what benefits your bank an average of $0.67 a month, a customer may be receiving free online banking, free bill pay, free checks, free mailed check images and more. Relationships like this are not very profitable, and you may want to grade them as special mention.
Generally, there are two approaches for improving the economics of the deposit relationship: meaningful minimum balance requirements or charges for certain services.
Regarding minimum balances, as rates decline, demand deposit balances generate less income. Therefore, $1,000 invested when overnight rates are at 5 percent is worth more than when rates are at 1 percent. Where you set minimum balances will be more a function of your bank's account mix, but in today's rate environment, consider $500 to $750.
With respect to implementing charges, evaluate services that cost money to provide, such as account statement production and fulfillment. …