Reg, Reg, Go Away: Sorry Banks, They're Here to Stay

by Bart Narter, April 29, 2010
Industry Trends
EMEA, Latin America

Abstract

The US government has come down with new regulations on the financial services industry, and more are expected. What are the implications for retail financial institutions? Celent estimates 15% of checking account revenue is at risk with the new Reg E. How should financial institutions respond?

In a new report, Reg, Reg Go Away, Celent examines one of the most important government responses to the financial crisis. It has been, and will continue to be, an increase in regulations of financial institutions. This report examines the impact of two newly changed regulations, Reg DD and Reg E, and what they mean for the retail banking business.

While Reg DD impacts communication with the customer, Reg E will dramatically change the top and bottom lines of most retail financial institutions (FIs), and not for the better. This report addresses what the changes are, what FIs need to do to comply, and perhaps most importantly, how FIs should proactively respond to the new regulatory environment.

Celent lays out a number of options:

  • Wait and see: Do nothing and wait to see what everyone else does.
  • Raise price: Eliminate free checking.
  • Create bare bones accounts that are free, and upcharge everything else.
  • Create bundles that customers are willing to pay for.
  • Offer value-added services such as expedited bill payments, secure storage, ID theft protection, one-time opt-in, etc.
  • Reduce costs on technology and operations. Pare the branch network.
  • Relationship pricing: Grow share of wallet.
  • Fire customers: Understand customer profitability and get rid of customers who aren’t profitable.

“Checking customers with low and frequently negative balances have been subsidizing free checking for quite some time,” explains Bart Narter, Senior Vice President of Celent’s Banking Group and author of the report. “As regulations cut into the NSF revenues, these subsidies will shrink, and banks need to respond intelligently.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America (Boston)
Tylor Tourville
ttourville@celent.com
Tel.: +1 617 424 3284

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)208 870 7875

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81.3.3500.3023

Table of Contents

Executive Summary

3

Reg DD

4

Reg E

5

Sample Opt-In Form

6

 

What You Need to Know about Overdrafts and Overdraft Fees

6

Finer Points of Reg E

8

What Are the Impacts of Reg E?

9

What FIs Need to Do

12

 

Operational

12

 

Strategic

12

 

Wait and See

16

 

Create Bare Bones Accounts

17

 

Raise Price

18

 

Create Bundles

18

 

Offer Value-Added Services

19

 

Reduce Costs

19

 

Grow Relationships with Relationship Pricing

20

 

Fire Customers

22

Conclusion

24

Leveraging Celent’s Expertise

25

 

Support for Financial Institutions

25

 

Support for Vendors

25

Related Celent Research

27

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