Why Add a Monthly Fee if You Don’t Expect to Collect It?
Sometimes a banker does or says something that makes you shake your head in amazement. This occurred last Thursday when the folks at Wells Fargo made the announcement that it was dropping free checking in six more states – replacing it with its “Essentials” Checking account that has a $7 monthly fee.
While I encountered numerous online articles about this move, it was one sentence in the article by JD Malone of Allentown, Pennsylvania’s newspaper The Morning Call that got my attention.
The sentence reads: “Wells Fargo told Reuters that it believes 80% of customers will avoid the fee altogether and that it is offering a $2 discount on the fee if customers sign up for paperless statements.”
Avoiding the fee will require these former free checking customers to either maintain a $1,500 minimum daily balance or have more than $500 in direct deposits each month.
If you are, or were, a Wells Fargo free checking customer, by now you’ve been treated to over two years of “poor me” news articles about the big banks’ need for additional fee income for a variety of reasons, including:
- The banks have been losing money offering free checking.
- The loss of overdraft fee income due to legislative changes.
- The loss of debit card interchange fee income due to legislative changes.
- The estimated cost of complying with new legislation – particularly Dodd-Frank.
- The costs of providing mobile banking services.
And I’m sure other reasons have been provided that I’ve missed.
So, when Wells Fargo sends you a notice advising you that your free checking account is being replaced by the new “Essentials” checking account with its $7 monthly fee, you reason the purpose of the fee is to replace the billions of dollars the bank has been losing for the past couple of years or longer.
Unfortunately, this reasoning seems to be contradicted by the statement above about the bank believing 80% of its Essentials Checking customers will avoid paying the fee.
This begs the question as to the bank’s real motivation behind implementing the $7 monthly fee on the free checking replacement account.
One school of thought is that the threat of an onerous monthly fee will persuade more customers to maintain the minimum daily balance. What we don’t know is the average daily balance held in the free checking accounts and how it compares with the new $1,500 dollar amount. And, given the fact that banks like Wells Fargo can borrow money at near zero percent both from other banks and the Federal Reserve, does it really need these additional consumer deposits?
Another perspective concerns the direct deposit requirement. It’s hard to imagine that many checking customers exist who don’t already have the necessary direct deposit relationship in place. Wouldn’t you love to know the penetration of direct deposit among the bank’s free checking customers? Direct deposit has been with us for decades and is commonplace today. Even a majority of us old geezers have our Social Security payments directly deposited to our checking account. Do the folks at Wells Fargo really believe that having direct deposit makes a checking account more “sticky?”
Based on my years of experience offering free checking accounts at a large bank, the free checking account has the lowest rate of attrition, by far, when compared to other types of checking accounts. That’s being sticky.
After all, other than death or moving, why would any rational customer want to close his or her free checking account?
Perhaps a major motivation for this repricing is that it enables big banks like Wells Fargo to drive away those undesirable customers who keep low balances in their free checking account. This begs the question – what ever happened to the idea of a “Lifeline” checking account for those low-balance customers like college students and retirees on fixed incomes?
What remains a mystery to me is why big banks like Wells Fargo eliminate free checking, replacing it with a checking account that has a monthly service fee and then aren’t bothered when only 20% of its checking customers will pay the fee?
This tells me that repricing isn’t about generating fee income but some other agenda that isn’t being talked about in the media.
One thing we do know for sure – the big banks have disliked the free checking account since they were forced to offer it in the mid-to-late 1990s.
What really shocks me is that so many consumers continue banking with the four mega-banks when free checking is still available from so many community banks and credit unions.