Here Are Your Answers, Susan
A blog reader asked some interesting questions about one of my past posts. I feel the answers deserve a post of their own.
My original post said free checking was introduced to the public through community banks and credit unions in the 1980s. Eventually, free checking spread everywhere. I suggested, now that the larger banks are dropping free checking and it’s once again becoming the domain of community institutions, that we might be repeating the cycle.
Susan, our reader, commented, “This is definitely interesting. But to what extent are non-free checking banks losing customers? With banks offering qualifying activities to continue to receive free checking, aren’t they simply losing the customers that don’t qualify and are therefore unprofitable?”
Excellent questions. I have some information that may offer answers.
The press reported this and I have access to a report that says the same thing: one regional bank lost 250,000 customers in the months after it imposed a fee on checking accounts with balances under $500. In other words, when it eliminated free checking, it lost a quarter-million current customers. The report I refer to also shows new account openings dropped more than 50% over the previous year when the bank offered free checking.
While I don’t have statistics for other large banks, let’s assume this one example isn’t isolated. A report based on an ACTON Market Intelligence consumer survey conducted in late 2010 shows 67%, or two-thirds of Americans with checking accounts said they’d leave a financial institution if they lost their free checking accounts.
As for profitability of checking customers, based on the examination of data from our own banking clients, we show each checking customer accounts for, on average, an additional 2.35 account openings. It seems to show even a free checking customer (and our clients promote free checking) is profitable, either through the checking account itself or through use of additional accounts.
Most free checking accounts don’t pay interest, and even if an account does the current interest rates fall to the right side of the decimal point. (Reward accounts excluded.) For financial institutions, those checking deposits are a low-cost source of money for investments and loans.
But free checking customers are low-income bums with tiny deposit balances, right? Hmmm. Maybe not. Our hard-working statisticians in Data Management gave me a few numbers that say different.
The average balance in all free checking accounts measured during our many clients’ most recent campaigns in 2011 is $1,326. That average is down from the year-end average of $1,659 for free checking customers.
At the same time, the average balance in all our clients’ retail checking accounts combined is $1,978 during current campaigns and $2,380 at year-end.
Still, the average free checking account customer has a healthy balance in the account, comparable to non-free checking accountholders, and so is not a leach on the financial system as some banking executives stereotype them.
During conversations and creative meetings, I find many executives and marketers think one of their special pet checking accounts is the most-often opened. Yet when we analyze their customer data, we find the free checking account results in the highest customer use. It’s surprising to many clients and damages plenty of preconceived, but incorrect notions.
So, in summary…
- Yes, it appears financial institutions that drop free checking are losing customers.
- A majority of customers will leave a financial institution if they lose their free checking account.
- Free checking customers, like other checking customers, open additional accounts, which increase a financial institution’s profits.
- Free checking customers provide interest-free deposits for the financial institution to use.
- Free checking customers keep balances comparable to customers with other types of checking accounts.
So, Susan, I hope I answered your questions in some small way. Thank you for reading and communicating. You gave me a chance to share some important information with you and the rest of this blog’s readers.
My special thanks to Sheryl Pate, Data Management, for her time and effort to compile the checking balance report for me. I’ll use it for many projects.
Download a free copy of the ACTON Market Intelligence report I referred to above in paragraph six, Free Checking & The Banking Customer. Every financial services marketer should have a copy.