See, credit unions were exempted from the Durbin Amendment and as a result they have no revenue shortfall to make up for. It’s important to keep in mind that credit unions may not be charging their customers any debit-related fees, but the fees they charge retailers accepting their debit cards are now much higher (83%, to be exact) than what big banks charge.

So we should not be losing sight of the issue that got the whole thing started – the size of the interchange fees. The way I see it, the issue is a very simple one. If a fee charged by one bank to a retailer is considered too high, it should also be considered too high if any other bank charges it to that retailer. I just can’t see it any other way and I can guarantee you that retailers see it exactly the way I do. http://blog.unibulmerchantservices.com/credit-unions-muscle-in-on-big-bank-territory

I’m not implying it is a “stroke of genius” for BofA to charge for the debit card. Quite the contrary, there are much better ways to “fix” the profitability of unprofitable checking customers than BofA’s chosen way, which is effectively firing customers – both unprofitable and profitable(!).

In regard to your statement, why didn’t they do this “clever fee scheme” sooner (pre-Durbin), the answer was probably because overdraft revenue (pre Reg E changes) was underwriting enough profitability (along with pre-Durbin interchange income levels) so as not to have to engage in a debit card fee (just speculating, but this is the case in most banks over $10 billion in assets).

I do agree with your position that this is in response “to meet the profit demands of shareholders”. However, BofA grossly underestimated the public’s and media’s reaction to this perceived unfair exchange of value with its customers. They clearly were not thinking like one of their customers. Or they didn’t read or believe the research about debit card fees that was out there before they installed their fee, forecasting such a public reaction.

What I find ironic is CFPB was installed to bring more transparancy to banking to protect consumers, not to cap banks revenue (from my understanding). BofA comes out with a very transparent fee, three months before even initiating it, and all hell breaks loose over it. The regulations/institutions in Washington seem to be driving the exact behaviors they were intended to (shrinking banks, making banks more stable, bringing transparency, etc), and we don’t like it. It’s like no matter what we order from the menu we are not going to like; all we want to do is complain.

The other question about accounting for costs comes from the customers’ point of view. Do financial institutions really need to tie fees so closely, so deliberately with costs like “Debit Transaction Fees?” That kind of thinking results in a messy maze of fees — a huge menu with fees bearing cryptic names, tedious explanations and lots of conditions. “Paper Statement Fee,” “Customer Service Fee,” “Excessive Withdrawal Fee,” etc.

If the cost/complexity of offering checking is so great, why not simply calculate one overall fee for each type of account? Instead of rolling out one fee after another, especially when you know they will apply to pretty much every customer? Why not just increase the overall account fee? Wouldn’t that have been a more manageable approach — from both a sales- and PR perspective?

What’s harder to sell? A $5 monthly debit card fee with a $12 monthly account maintenance fee, or a $17/month checking account?

For a community bank or credit union to throw open the doors without a strategy to either make these folks profitable or impose fees for service is unwise. As cooperatives, credit unions should know that members who don’t participate reduce the benefit to those who do. That’s what a cooperative is all about. Why should B of A customers enjoy a free ride if they choose to move to a credit union or community bank?

I do like the idea of hot prospects. Credit unions and community banks with solid marketing strategies should be able to get the loans as well as the deposits from customers who have already voted with their feet. It’s that inertia thing again where an object in motion tens to stay in motion. Once a customer makes a change we should be able to keep those changes coming if we know how to do it.

1.) “Up to [80%] of checking customers are unprofitable.”
2.) “Banks and credit unions have no clue whether checking customers are unprofitable or not.”

Without knowing how each specific financial institution defines the profitability of its checking relationships — particularly on the cost side — it is impossible to evaluate the veracity of either statement, especially in BofA’s situation.

There are very few, if any, Community Banks or Credit Unions that have the efficiency ratio of a large Bank – including BofA. Regardless of what one may think about the mega-banks, it is certainly indisputable that they are far more efficient than Community Banks and Credit Unions (in large part due to scale effect). As a result, a customer relationship that is unprofitable (eg. loses money) for BofA is virtually guaranteed to be unprofitable for Community Banks and Credit Unions.

Now, the next point of focus is to determine if the debit card fee (or any other fees) are directed at the customer segments that are unprofitable or if they may possible impact other customer segments, that could in fact be profitable to the Bank. As was true for revised checking account fee schedules, debit card fee and other fees that will be introduced in the near future, consumers have a way to opt-out based on account selection and/or overall scope / size of their banking relationships. Those consumers with a broad relationships and/or large balances have not and will not be impacted by these fees; others who have limited number of products and small balances will find it difficult to avoid the fee.

Unfortunately, the economics of retail banking relies on a small minority (typically less than 20% of the customer base) to subsidize the costs associated with supporting the majority of money-losing customers. So much so, that the top 20% of customer base generates over 140% of total profits (with direct implication that 80% of customer base destroys 40% of profits). So, many retail banking customers have been unprofitable for Banks… the difference today is that with the changes to Reg E and Durbin, with the colossal mortgage and credit card loses, Banks are finding it impossible to absorb these costs. As a result, there is a bifurcation in customer classes, resulting in consumers with low balances being transitioned into entirely self-service (eg low cost) structure or being asked to pay fees.

Can Community Banks and Credit Unions convert unprofitable customers into money-making (or at least break-even) customers? Almost impossible! Yes, Community Banks and Credit Unions are unaffected by Durbin, but virtually no one expects the exclusion to last for more than 18mo. Furthermore, smaller Banks and Credit Unions are much less efficient (as described above) than larger banks, thus the cost to service new accounts will be larger as will the operating loses.

The banks that can generate profitability from these customer segments are those that operate at very high levels of efficiency and most likely, have no branches – eg. online only Banks. Names such as Ally, ING Direct, CIT (new entrant), State Farm Bank, and of course new entrants such as BankSimple and MovenBank. These organizations operate in absence of branches & branch staff which accounts for 50%-60% of a typical bank’s cost structure. This cost advantage enables these organizations to be more creative in their offering, pricing and marketing.

Consumers can rightfully celebrate their win! However, the economics for Banks – large or small – has not changed. Banks will need to find a way to generate revenue (eg. fees).

Community Bank and Credit Union executives should very carefully consider their options so as to determine how best to build a customer base that will value services provided but also one that is capable of generating profits. Regardless of the type of institution (profit or non-profit), growth and profitability remain key factors as they impact relevance in the market, efficiency and therefore, likelihood of ‘weathering the storm’. Banks continue to see escalating demands from constituencies – robust online banking, mobile banking, RDC, marketing / branding and compliance related costs — and last time I checked, very few vendors are giving these services away for free.

I did not intend to imply that I thought that the move was a “deft” strategy.

After correct pricing is established, a positive customer experience must be provided, where the customer opens there account and is onboarded successfully (provided ‘go with’ services that the customer will use and which will make the relationship complete). After the onboarding process, the customer should be offered additional financial solutions that meet their needs.

For many banking relationships, ‘profitability’ is only achieved with time and nurturing much like any successful relationship. There are no guarantees.

It is unlikely however, that any banking relationship will be profitable overnight or that the relationship will survive without attention to needs and providing value added benefits.