The relentless surge in deposits, a collapse of overdraft revenue and competitive pressure from new entrants means that banks will be grappling with reduced fee income for much of 2022.
Many retail customers won’t accept traditional fee hikes on basic products, especially when fintechs are wooing them with creative features. And commercial customers, already frustrated by a system that boasts thousands of price points, are looking for greater simplicity. At the same time, financial institutions must be highly attuned to regulatory flags that could result from heightened government oversight.
Curinos believes that product innovation that overhauls fee structures can help drive revenue in 2022. This strategy will succeed, however, only if banks understand the very different payment and liquidity needs of their customer segments and provide a broader range of more personalized (and fenced) offerings that fit those needs.
TRENDS BOLSTER NEED FOR INNOVATION
There is little doubt that the traditional days of branch-led customer acquisition are fading fast, replaced by data driven, marketing-led strategies for new products and services.
Nowhere is that more apparent than at neobanks like Chime. Such neobanks overcome their lack of local presence with massive advertising and the use distinctive product features to scoop up a bigger share of new checking accounts. (See Figure 1.)
Figure 1: Neobanks are gaining ground in checking accounts
Year Primary Checking Account Opened – Primary Bank Type
The COVID-19 pandemic has only highlighted (and accelerated) these challenges. Additional branch consolidation is a front-burner issue at many institutions because customers just aren’t flocking back to the branch even when pandemic-related social distancing policies are loosened. As a result, the appetite for better digital capabilities is only increasing, particularly as consumers and businesses are demanding different solutions for cash management, emergency savings and overall financial management.
CONSUMER PRODUCT AND FEE INNOVATION
The industry is beginning to respond with new ideas for the same old products: creative providers are trying to incorporate savings behaviors into payments and cash management products. This is a prime space in which banks can segment their approach by customer type, creating products with different levels of complexity.
Several banks have also introduced programs in which they waive fees or provide other incentives for customers who open multiple accounts at the same time.
Others are beginning to develop “super apps” that integrate savings, investing and savings behavior.
Finally, Curinos has found that loyal customers may readily respond to rewards and innovations other than fees.
A focus on personalized offerings can help identify the fee sensitivity of customers and what they are willing to trade off against different fee treatments. Curinos research and experience has found that the right product positioning and packaging based on segment-driven insights can drive a 20% lift in resonance and consideration. (See Figure 2.)
Figure 2: Neobanks are gaining ground in checking accounts
NTB Checking Account Acquisition1
To that end, Curinos has identified at least six types of cash management consumers based on “engagement” level—an attribute that can be key to gauging the acceptance of new fees and products. (See Figure 3.) One such customer type is “Engaged Worriers,” who trust banks but aren’t confident in managing their own finances and cash flow. These customers may accept fees on new products that help them manage day-to-day spend while encouraging savings.
Figure 3: Understanding customer segments is critical to fees and innovation
Generational segmentation also helps banks to design products for specific groups of consumers with unmet needs. (See Figure 4.) Indeed, subscription pricing can be more effective with certain age groups than others. (See Figure 5.)
Figure 4: Different age groups have different unmet needs
Potential Product Features by Consumer Cluster
Young – Gen Z
Figure 5: Subscription pricing is an innovation that helps drive fee income
Appeal of Pricing Structures Relative to General Population
Willingness to Pay by Segment
Price of subscription fee relative to waivable monthly account fee
Among HENRYs, subscription pricing is more attractive than a waivable monthly account fee
Younger and lower-income segments are willing to pay a higher fixed subscription price than a waivable monthly account fee waivable monthly account fee
Source: Curinos Product Research Insights
COMMERCIAL PRODUCT AND FEE INNOVATION
There are also opportunities to drive innovation in commercial banking. Although fintechs haven’t made as many inroads here yet, banks can front-run the future competition by optimizing their fee structures and products by customer type. Since commercial banks canceled or scaled back price increases during the pandemic, the industry today has an ideal opportunity to tailor packages of price increases that better meet different needs of corporate customers.
The customers who received discounts or fee waivers last year or small increases in 2021 should be presented with tailored increases — versus across-the-board increases.
HOW MUCH IS TOO MUCH?
Simply matching fees on the way down isn’t an effective option for banks in the face of competition from new entrants.
Digital transformation of an industry often drives prices lower. But most customers are willing to pay even higher fees for a product that better fits their needs. Digital transformation opens up those kinds of opportunities.
New entrants in the banking industry are winning checking accounts because traditional providers haven’t been paying enough attention to their customers’ need for better products. Some banks may justify the departure of customers by saying they weren’t profitable anyway. This ignores the value they contribute to the overhead or the possibility that an offering that can meet their needs and turn them into profitable customers.
Banks that don’t create new products and fee structures given the onslaught of fintechs will find that they will lose their connection to customers and merely be the omnibus repositories for deposits.
Smaller Providers Can Innovate Checking Products Too
Small providers (especially those with less than $10 billion in assets) face challenges when it comes to product innovation, but here are some strategies to help them find their footing and maintain profitability in the fast-changing industry. The adoption of such strategies can improve profitability by as much as 20%, according to Curinos estimates.
Optimize Existing Product Suite.
Some small banks and credit unions lack the analytic capabilities to manage the product suite. As a result, many offer too many products that their customers just don’t want or need. Chances are that even the bankers aren’t selling all of them. Simplicity rules in today’s market, so focus on those products that are best for most customers.
Be a Fast Follower.
You don’t have to re-invent the wheel to maintain momentum. It may make sense for some to merely emulate the movers and shakers, responding quickly to the new strategies. That doesn’t necessarily mean you need the lowest fees, but you need to show your customers and prospective customers that you are keeping up with the times. As the saying goes, “you don’t have to outrun the bear, you just have to outrun the person next to you.”
Restructure Product Line.
This option is the most comprehensive because it requires the creation of distinctive and innovative products. This can be a safety-net product to steer customers away from overdraft fees or a subscription service. The challenge is that these innovations take a minimum of six months to bring new products to market.
Innovate Overdraft Features.
If you can’t tackle the whole product suite at once, pick a place to start. Overdraft is going through an industrywide overhaul, so now’s the time to develop new features and fees based on what consumers want and need. Furthermore, you will be at a competitive disadvantage if you don’t.
There’s no doubt that consumers are changing their behaviors and expectations. Large and regional institutions, neobanks and fintechs have pounced on their willingness to try new features and products. Some small institutions already have eliminated overdraft fees altogether. But it’s not too late for smaller institutions to make their mark. If they don’t, they will continue to fall behind the pack.