6 April 2010
I just received a statement stuffer from one of my banks providing me "Important information for consumers about your checking account." This is about the changes to Reg E. Consumers must opt-in to overdraft protection for one time debit card purchases and ATM transactions. This is a game changer in the world of retail banking and might spell the end of free checking. According to the FDIC, about 40% of all overdraft transactions are generated by such debit card transactions. If 50% of a retail bank's revenue is overdraft revenue, the bank just lost 20% of its revenue. What to do? The first thing is communicate this message to your customers and find those who value the overdraft protection and will want to opt in. Banks must also understand their customers a bit better to figure out which are unprofitable today and which will be unprofitable under the new Reg E. Bundling products can help cross subsidize the current account which is typically the anchor account of the relationship. Consumers are used to paying fees for mortgages, credit cards, reward programs, etc. Can you create fee bundles for these products that make the checking account profitable? Can you negotiate across lines of business at your bank? The debit card was a game changer for the demand deposit account in a good way, lowering costs and increasing revenue via interchange. It may now become a game changer again, with few consumers opting in and revenue dropping, forcing banks to rethink the free checking business model. The big problem is that once customers have had something for free, they are unlikely to pay in the future.