WHAT CAUSED THE CURRENT UNSTABLE PRICING SITUATION?

It seems as though, all of a sudden, banks found themselves drastically searching for additional sources of revenue.

Why?

The housing bubble enabled by the trillions of dollars of mortgage-backed securities sprang a serious leak in 2007 and collapsed in 2008, exposing a majority of the nation's banks to massive losses and the need to put billions of dollars into loan loss reserves.

This collapse led to a credit crunch whereby banks severely curtailed lending both to business customers and consumers.

Consumers developed a growing distrust of banks – especially the big, mega-banks – as a result of the housing collapse and resulting severe recession.

We witnessed an almost overnight change in consumer behavior as they scramble to aggressively pay down debt while simultaneously making an effort to put money away in savings accounts.

Perhaps the straw that broke the camel's back were two major pieces of federal legislation – one dramatically impacting the revenue streams of credit card issuers and the other promising a dramatic drop in overdraft fee income as a result of new overdraft opt-in requirements.

The culmination of all these events is a severe strain on banks' revenue streams and earnings.

Since the overdraft opt-in legislation impacts all banks and credit unions, this set off a massive hunting expedition to replace the predicted loss of NSF income later this year and in the years ahead.

Immediately in the cross-hairs of these fee income hunters is the ubiquitous free checking account that became so popular since its introduction in the early 1980s.

The knee-jerk reaction of many bankers is to slap a fee on the easy prey…the low-hanging fruit of free checking.

After all, they can now quickly claim that all along, free checking customers were getting a free ride – being supported by the approximately 10% of customers paying the bulk of the overdraft fees.

Although not true, it makes for a good story line to feed the public.

In reality, free checking didn't suddenly become unprofitable because of the prospect of lower NSF fee income. Free checking was profitable years ago when NSF fees were still in the $12-$15 range. So what's changed?

In this looming fee battle, the consumers have the Internet and its array of social networking sites on their side as we'll discuss below.

For now, let's consider how tough it's going to be trying to justify repricing no frills checking accounts.

JUSTIFYING THE NEW MONTHLY FEE

If you add one or more fees or a minimum balance requirement to your free checking account, how are you going to justify this to your customers?

Today's value-oriented consumers will demand a realistic and honest explanation as to why your bank is repricing their checking accounts.

And you can bet the millions of consumers frequenting social media sites will demand it.

As will many bloggers and members of the media.

Using new features or benefits as the rationale won't cut it. Remember, these checking customers selected a no frills account in the first place.

Here are some honest options you have:

1. We've been losing money on your account and now need to start charging a fee. Your no frills checking account has been subsidized by other checking customers already paying fees.
2. We've made too many bad loans and our growing loan loss reserves require that we add a fee to make up for these losses on the lending side of our business.

3. We've added some features we know you'll like and it requires we add a fee to cover the cost of these new features.
4. The amount of revenue we get from overdraft fees is going to shrink dramatically, therefore we need to add a fee to your account to make up for these losses.

5. New government regulations are forcing us to add new fees and increase existing ones. We simply have to pass along the cost of compliance to our customers.
6. Declining checking revenue will negatively impact our stock price and this is unacceptable to our shareholders.

7. Most other banks are adding fees and minimum balance requirements and we are simply following their lead. This is the "everybody is doing it" reason.

While we realize these explanations sound harsh, the objective here is to force you to think about how you are going to explain a new fee or balance requirement that your customers didn't want in the first place.

Bottom line, thanks to the troubled economy and growing distrust of banks, consumers are going to be much more demanding of the explanations given for adding fees and new minimum balance requirements.

By now you are undoubtedly familiar with what happened to Citibank's attempt at repricing its free checking accounts – EZ Checking and Access Checking. Originally announced on November 2, 2009, the bank was forced by New York Attorney General Andrew Cuomo to change its original February 1, 2010 implementation date.

According to Cuomo, Citibank improperly notified its free checking customers of the new monthly fees and per-check charges while failing to disclose in advertisements that it had the discretion to end free checking.

Your newsletter editor does not have one of these Citibank checking accounts, and a thorough search of the Internet failed to turn up the exact wording of the original change notification. One blog responder mentioned a brief notice on his November statement which required a trip to the bank's website for the details.

In other words, the bank was less than forthcoming with the reason or reasons behind the repricing.

Generally, in the past when banks announced a repricing, they provided fuzzy reasons such as:

• To better serve you, we are adding a monthly fee and…
• In order to simplify our checking accounts, we are adding a monthly fee and introducing a minimum balance requirement to…
• To recognize and reward our preferred checking customers who maintain the necessary balances…
• Increasing costs are forcing us to introduce a new monthly fee and…
• To better align our products with those offered by our competitors, we are increasing our minimum balance requirement and…

Be advised that such superficial reasons will no longer meet the needs of today's value-focused customers. Nor will they escape the ire of thousands, if not millions, of online consumers who love nothing more than to share their banking frustrations with others.

If you are planning to reprice your free checking accounts or any of your checking accounts, you had better come up with a solid, believable reason for doing so and provide it in simple language to your customers.

Not only do they expect it, they deserve it.

While pondering any repricing notice, remember the sage advice of legendary adman David Ogilvy, "The customer is not a moron, she is your wife."

BEWARE THE POWER OF THE INTERNET AND SOCIAL MEDIA SITES

The old days of cryptic repricing disclosures are gone.

Today it's much tougher, if not impossible, to slip repricing changes by your customers – especially if they are unwelcome changes like those being bandied about by bankers.

Thanks to the Internet, more and more consumers are going online and to social networking sites to determine what to buy and from whom.

They are quick to vent their frustrations over perceived injustices like fees being added to their free checking accounts.

This trading of product and service information occurs on a daily basis all over the Internet.

Wise marketers and senior management are tapping into this growing source of valuable consumer information.

It's what Advertising Age columnist Bob Garfield calls "Listenomics" – a topic we introduced in last month's issue of this newsletter.

Garfield introduced the marketing world to "Listenomics" in his October 11, 2005, Advertising Age article, "Inside the New World of Listenomics." And it’s the focus of his newly released book, The Chaos Scenario.

According to Garfield, the successful companies moving forward will be those that tap into the ongoing consumer conversations available online and use this wealth of information to make product and pricing decisions.

Basically, you are tapping into the wisdom of crowds and using this timely and valuable information to make better product design, pricing, and marketing decisions.

An excellent example is the January 22, 2010 article in the New York Times by Ron Lieber, "Would You Pay for a Checking Account?"

In addition to the question posed in the article's title, at the end Lieber asked, "Do you view free checking as an entitlement? What would a bank have to do or offer to get you to pay for your bank account?"

As of February 5, 2010, there were 124 reader responses to the question of whether or not they would pay for a checking account.

Here's the breakout of the responses:

Yes = 10
No = 77
No opinion = 37

Apparently, the no opinion folks are those who can't follow directions and simply answer the question.

What's striking about reading these responses is the passion in the responders providing the "no" answers. Many of them cite the fact that banks shouldn't have to charge a fee as they are getting the use of our money interest-free.

This is just one of the many blogs and article reprints on the topic of either dropping free checking or repricing it so it is no longer free.

A quick Google search of keywords like "free checking fees" and "the end of free checking" will provide you with ample sites to practice your "Listenomics" skills.

In addition, there's always primary and secondary research data available for hot topics such as the reasons for opening and closing checking accounts and the importance of checking account attributes.

WHAT THE RESEARCH IS TELLING US

Undoubtedly, a number of research studies have been conducted lately to get a feel for the impact adding a fee will have on consumers closing their checking accounts and switching financial institutions.

One such study is the Second Quarter 2009 ACTON Market Intelligence Best Banking Practices research.

When bank customers were asked why they closed a checking account, high fees frequently ranked high on the list of reasons. Here's the data by geographic region:

Northeast

24% said high fees
21% said bad customer service
21% said fraud or stolen ID
16% said they needed the cash
15% cited inconvenience

South

26% said they had moved
22% said they no longer had a need for the account
21% noted a dispute over the account
18% selected bad customer service
16% said high fees

Midwest

40% cited bad customer service
25% selected poor interest rates paid
24% said they no longer had a need for the account
16% said high fees
16% noted a dispute over the account

West

50% said high fees
24% said bad customer service
14% said poor interest rates paid
12% said they had moved
11% cited bank instability

If you're serving customers in the Northeastern or Western states, slapping a new fee on current checking accounts doesn't seem to be a smart move, especially if it eliminates free checking or another no-frills account.

For those of you with customers in the Midwestern and Southern states, you risk losing an additional 16% or more of your customers to a competitor that avoids the knee-jerk fee decision. This is above and beyond the normal level of attrition due to death, moving, and related reasons.

This research data coupled with the information gleaned from the Internet should be sufficient to reconsider any repricing moves resulting from the recent overdraft opt-in legislation.

You can learn more about AMI research here.

OPTIONS OPEN TO FREE CHECKING CUSTOMERS

In spite of all the articles suggesting the death of free checking, it's safe to predict that a number of smaller banks and credit unions will stick with free checking.

Not only is it the right thing to do for their customers, it will give them a powerful differential advantage over the bigger banks – particularly those mega banks that believe most consumers are willing to pay a fee for checking in return for a large branch and ATM network.

As a result, we can expect to see some number of financial institutions shift marketing dollars into aggressive campaigns promoting no frills and free checking accounts.

This creates a "perfect storm" resulting in a dramatic shift of checking accounts away from the bigger banks and into the hands of the smaller community financial institutions.

The perfect storm comes about as a result of:

• Big banks eliminating free checking through repricing, resulting in a higher than normal amount of attrition as customers make the decision to finally do what they've been threatening to do for some time – move their accounts to a local bank or credit union.

• A number of smaller financial institutions staying the course with their no frills checking accounts.

• The aggressive small financial institutions vigorously marketing their no frills and free checking accounts.

Helping accelerate this dramatic shift of checking accounts will be all the media hype surrounding this mass migration. The migration will be pushed along by all the Internet blogs and social media sites focusing on the event as described above.

And let's not forget about the existing movement started by Arianna Huffington and a few of her friends. In late December they launched a nationwide campaign to persuade consumers to withdrawal their money from the nation's top four banks and move it to smaller, community banks and credit unions. We first reported on this in the February issue of this newsletter.

Details about this campaign are available here.

Another option open to those free checking customers whose accounts are being repriced will be some number of online banks that will continue offering some form of a no frills or free checking account.

Still another likely option will be some of the bigger banks who, in the face of mass attrition, public scorn, and competitive pressure, will relent and perhaps offer free checking in some limited form online.

Bottom line, it's very likely that while millions of free checking customers may be displaced by their current mega-banks, options will be available allowing them to have free checking or no frills checking for some time to come.

It's simply not going away.

WHAT DECISION WILL YOUR FINANCIAL INSTITUTION MAKE?

While it's true your premium checking accounts may generate more revenue, the simple fact is there'll always be much fewer of them. One good reason you need your no frills account or accounts is to help absorb your significant fixed costs for your branch and ATM networks.

In addition, your no frills account base provides a significant part of your cross-sell foundation.

When you anticipate a revenue shortfall like that pending from the coming overdraft opt-in situation, the best solution isn't to torpedo one of your best products by adding a fee and minimum balance requirement.

Remember, these no frill accounts provide your financial institution with:

• Loyal customers
• Less attrition as they tend to be stickier accounts
• A sizeable cross-sell foundation
• The ability to spread fixed costs among a larger base

As a reminder, branch banking supported by an ATM network is a fixed-cost business. Losing customers often means the difference between loss and profitability.

As a number of major and smaller financial institutions can be expected to throw free checking and other no frills accounts under the bus, staying the course provides you with a unique marketing advantage.

Thinning out the free checking bank herd will be good for the survivors.

Remember – we are in a deep recession and consumers are changing their purchase behavior. They are seeking value in the products and services they acquire. Now seems a very bad time to add new checking account fees.

And never forget that checking accounts are your sole remaining franchise. It's the core relationship for your best customers. Don't risk driving them away by adding a new, punitive monthly service fee.