This ad appeared in the March 25, 2012 edition of the Lincoln Journal Star newspaper in Lincoln, Nebraska. Unfortunately for the bank, they named their free checking account Smart Checking and merely describe it as free in the ad. You’ll note the bank pays interest on this free checking account. To earn interest each month, customers must meet certain criteria including using e-statements, doing online banking, using his or her Visa Check Card at least 12 times per month. The account remains free of a monthly service fee and minimum balance requirement even if the customer fails to meet these criteria. This type of interest-earning checking account is known in the industry as a Rewards Checking account which is a product available to banks from BancVue in Texas. At least this small community bank is spending marketing dollars promoting the fact that it offers a free checking account. Paying interest is one way to differentiate your bank’s free checking account from free accounts offered by competitors – even in a low rate environment.
You can have the most sought-after product in the market but unless you aggressively promote it on an ongoing basis, it’s just another product.
As a result, banks and credit unions fail to put adequate – if any – marketing effort behind their free checking accounts.
Here’s a marketing tip: Free checking is not a marketing offer – it’s a product.
Having a FREE Checking account as part of your checking product menu is simply the first step in launching a successful marketing program to grow checking account market share. It’s the first piece of the puzzle.
By the way, the FREE Checking account has been around for many years – long before its breakout in 1982 with the introduction of the High Performance Checking Account Marketing Program anchored by the Totally Free Checking account.
What changed the face of Free Checking wasn’t the account itself – it was the turnkey marketing program banks used to aggressively promote it.
This turnkey marketing program consisted of several very important components:
- An appealing offer of Free Checking and a free gift
- A checking product menu consisting of seven unique accounts
- An ongoing direct mail campaign using a proprietary prospect list development tool
- Frequent, detailed response reports for management
- Exterior Free Checking banners
- In-branch promotional materials including free gift display
- A tell-a-friend program
- Check buyback of checks from previous bank
- Mystery shops
- Sales training
What made this program so successful is that most of the work was performed by experienced marketers working for the direct response marketing vendor that created the program.
Fast forward to today, many of the banks and credit unions offering Free Checking have either stopped using the turnkey program or have never used it. Others continue using a modified version. While offering Free Checking still gives them a leg-up over the competition, it does not deliver the volume of new customers available from using an aggressive marketing program of some sort.
Steve Topper, writer for ActonFS, writes in rebuttal to this blog post: How Durbin will Speed the Decline in Branch Banking.
I find it both astonishing and disappointing that so many people either in banking or writing about banking believe the free checking account is the source of today’s bank profitability problems.
I was reminded of this Tuesday after reading Brett King’s article, “Why Durbin will Kill the Branch,” forwarded to me by my blogging partner Joe Swatek. Joe knows that nothing gets me on my soapbox quicker than an article denigrating free checking.
King begins his article mentioning checking account fees. In the second paragraph he quickly establishes free checking as the villain. King writes: “In the US, there are actually people you meet who will tell you that free checking is, or at least should be, a constitutional right. Thus, emotions run high when a bank suggests that you now have to start paying for the right to keep YOUR money with their bank – it’s an outrageous concept to many!”
Paragraph three is spent blaming the banking industry for “training” consumers to demand free checking.
Paragraph four is devoted to explaining why free checking wasn’t really free – at least from the banks’ perspective. While it may not have been free for the bank, it was, and remains, free for consumers. As a long-time free checking customer my only out-of-pocket expenses have been buying checks and paying the infrequent foreign ATM withdrawal fee. Still, as long as I don’t have to keep a minimum balance or pay a monthly fee, it’s FREE checking.
It wasn’t until the fourth paragraph where King finally gets to his point – the Durbin amendment and its negative impact on interchange fee income for the banks. His final three paragraphs get at the heart of the profitability issue – to remain profitable, bankers in the U.S. need to follow the lead of Great Britain and close branches. According to King, since 1990 the number of bank branches in the UK has dropped by half.
At one point King suggests that U.S. bankers are now just waking up to the fact that they need to consider changes to their outmoded business model based on large brick and mortar branch networks.
Having written several blogs about the uncertain future of branch banking, I agree with King’s perspective that it is an outmoded business model.
Where I part company with King is his attempt, like many others, to make free checking the bankers’ whipping boy. It’s a red herring.
Eliminating free checking while introducing new checking account fees and increasing current fees won’t begin to solve consumer banking’s revenue and profitability problems. To invoke one of my favorite analogies – it’s like throwing a deck chair off the Titanic.
It’s a disingenuous argument.
The decision to offer free checking is a classic marketing decision. Many years ago, it was used successfully as a point of differentiation. This was long before high ODP fees and debit card interchange fees.
Consumers loved it as they believed then, and continue to believe today, that they deserve free checking as they are lending their money to the bank interest-free month after month. The fact that things have changed over the years from the banks’ cost and revenue perspective is irrelevant to these consumers. As things have changed, banks have failed miserably in educating their customers about these changes and their impact on account pricing.
Further proof that free checking isn’t the villain it’s portrayed to be is evident in the new “stealth” free checking accounts being offered by the mega-banks and a few followers to replace free checking. For example, the following three mega-banks all offer what I call a “stealth” free checking account which is a checking account that has a monthly service fee which can be easily avoided by simply agreeing to a monthly direct deposit as shown below:
- MyAccess Checking from BofA requires a monthly direct deposit of $250 or more.
- Chase Total Checking requires a monthly direct deposit of $500 or more.
- Wells Fargo Value Checking requires a monthly direct deposit of $250 or more.
Agreeing to a monthly direct deposit isn’t generating any additional revenue for these three banks.
In fact, years ago these banks would have been promoting these accounts as Free Checking with Direct Deposit. They had to stop as a result of Regulation DD, Truth in Savings which sets forth strict rules for advertising a checking account as being free.
So the next time you read an article that identifies the ubiquitous free checking account as the root cause of banks’ revenue and profitability problems, you’ll know it’s a classic red herring.
Personally, I think it’s great that the mega-banks and many of the nation’s regional banks have dropped free checking. This enables community banks and credit unions offering free checking to differentiate themselves from the big predatory banks with expensive branches in their market areas.
How Durbin will Speed the Decline in Branch Banking
Brett King, author of Bank 2.0
In the UK and Australia, account keeping fees are nothing new. In the US, however, since the introduction of the Durbin amendment, many US banks have been moving to monthly fees on checking accounts (we call them current accounts generally outside of the US) for the first time. These moves have resulted in often massive backlash from the public, including social media campaigns, “Bank Transfer Day” and further fuel for the Occupy Movement.
In the US, there are actually people you meet who will tell you that free checking is, or at least should be, a constitutional right. Thus, emotion runs high when a bank suggests that you now have to start paying for the right to keep YOUR money with their bank – it’s an outrageous concept to many!
The biggest problem for the US banking industry is that for the longest time it trained customers to believe that this was exactly how they should feel, what they should demand. Advertisers promoted ‘free checking’ for decades as the basic hook for new customers, although it could hardly be called a differentiation. The logic is that there is nothing better than free to attract customers to a new service platform. So how did banks pay for ‘free checking’?
Not really free
Well, it was never actually free. Banks initially made money off deposits (or Assets under Management), but as regulations tightened in the last 2 decades, rates dropped and spreads decreased, margins became razor thin. In th 80s as interest rates climbed, some banks instituted basic fees to combat the cost of savings accounts, but when credit cards became popularized in the 90s, banks now had fallback sources of revenue in credit fees and interchange that could sustain ‘free checking’. A side effect of the Global Financial Crisis is that credit card usage has declined as consumer “saving has become the new spending”, this means that a credit card isn’t working as an offset against basic account costs. With interest rates at historical lows and with no immediate signs of improvement, basic account profitability is at further risk. Then to add to all of this pressure along came the U.S Senator from Illinois, Dick Durbin…
The Durbin amendment to Dodd-Frank, has cut off the lifeblood of interchange fee from larger institutions, many of whom claim it will cost Billions in lost revenue. So while account keeping fees are seen as a mechanism to claw back loses on interchange, I expect it will have a secondary, more subtle consequence on retail banking.
Branch Economics Fail
In the light of revised economics of interchange and debit cards, the first reaction to loss of interchange fee in the US was to try to find new sources of revenue. However, the second reaction inevitably will be a realization that the cost base banks carry to support checking accounts via the branch is no longer viable – network is simply a luxury in a world where consumers just aren’t utilizing physical spaces for their relationship. With the best customers only visiting branches occasionally as they become increasingly digitally enabled, the expense of sustaining a network for a core product or relationship which looks more and more like a cost than a profit, becomes rapidly apparent.
The UK has had more than a decade to deal with this, which is undoubtedly why the UK has halved the number of retail bank branches since 1990. The US, with the false economics of consumer credit and interchange, have paid for their bloated physical infrastructure without the realization of the cost of changing behavior on their distribution model. That realization is now hitting hard as the real costs of an outmoded business model hit home.
The Durbin amendment will give banks the imperative to better manage the economics of their debit card and checking account business. As they are forced to be more disciplined around metrics, two issues will emerge. The first, that while the economics of branch banking are oft justified as supporting high-net worth customer interactions, that increasingly this demographic is moving to digital channels and the branch is no longer the lynchpin in this coveted relationship. How can it be when I use my mobile or internet to talk to the bank 30 times a month, but I visit the branch only twice a year? Secondly, the least profitable customers also are laggards to digital (largely due to adoption cost) and rely more heavily on tree-killing paper statements, ‘free’ checks and over-the-counter interactions.
Once you’re forced to re-examine your cost base in the light of changing distribution, behavior and regulation, the realization emerges that branches are not the profit centre they once were, but are now largely a cost that was hidden by the buffer of high interchange and credit card fees. Couple this with new challenges to the distribution model through Internet direct banks and non-bank FIs who offer better savings rates and lower fees on the basis of better economics, and branch banking will be mercilessly attacked by the big banks looking to retain their earnings-per-share.
The unintended consequences of Durbin may very well be the rapid unwinding of branch banking in the US. It takes a long time to turn the ship, but once that turn starts the momentum of branch closures will speed up rapidly.
It has become common for brokerages to offer free checking accounts. These provide another option for those who want to leave their megabank. Last year the brokerage firm Scottrade launched Scottrade Bank to offer deposit accounts to it brokerage customers. According to last year’s press release the bank was rolled out to only certain parts of the nation. I just confirmed that customers in any state can now open accounts. The bank offers checking and savings accounts, and CDs. However, the checking account will probably be the only account that’s appealing to most people since the interest rates are so low. The interest rates are only listed for customers when they’re logged in. The customer service representative (CSR) provided me the rates of the savings account. Since they’re so low, I’ll only provide the high-tier rate: 0.13% for balances from $100K up to $250K (as of 4/11/2012).
If you have a Scottrade brokerage account, Scottrade Bank and its free checking account may allow you to dump your local bank. The only reason that you may still need a local brick-and-mortar bank is for cash deposits. Below are some of the important features of Scottrade Bank’s checking account:
- No monthly service fees
- Free ACH funds transfers
- Free online bill pay
- Free checks and ATM/debit card
- ATM fee reimbursement program
- FDIC insurance
The ATM fee reimbursement program provides unlimited ATM fee refunds for cash withdrawals. There are no refunds for currency exchange fees.
Before you can open a Scottrade Bank account, you must first have a Scottrade brokerage account. The brokerage account requires an initial deposit of just $500 for all of our brokerage account types, but they do not require you to maintain a minimum balance.
New account bonuses are common at brokerages. Currently, there isn’t anything that great at Scottrade. One minor bonus is a ReferALL promotion. If you are referred by a friend or relative to Scottrade, you will both receive three free online trades. These free trades are good for up to six months. They are also currently offering a promotion to reimburse the transfer-out fees charged by other brokerages when you transfer to Scottrade. They will reimburse transfer-out fees up to $100 for transfers of $10,000 or greater.
Scottrade Bank is a sizeable bank with over $12 billion in deposits. It has an overall health score at DepositAccounts.com of 5 stars (out of 5) based on December 2011 data. Please refer to our financial overview of Scottrade Bank for more details. The bank has been a FDIC member since 2008 (FDIC Certificate # 58656).