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Curinos Perspective: Does Free Banking Have A Future?

Major U.S. retail banks have suggested that regulatory pressures and rising costs could force them to begin charging on accounts and everyday banking services that are currently free to use.

Leading the concerned voices, Chase created a stir last week when it warned its 86 million customers that they may need to prepare to pay for their bank accounts and wealth tools.

This may seem reminiscent of the last round of regulations (circa 2018-2022) when most banks took a step back from passing cost through to consumers for fear of attrition, while several of the larger institutions took action to defend profitability. Since then however, nearly all banks have modernized their overdraft programs, removing $5.5 billion in annual revenues from the consumer market last year and leaving 50% of the mass market segment.  

The new regulations intensify matters, threatening to push already precarious customer economics over a tipping point: A $3 overdraft fee cap would effectively wipe out the overdraft revenue pool. Compounded by revenue pressures on card late fees and interchange, 75% of mass market accounts will be unprofitable if regulations are enacted, according to Curinos estimates. At the same time, acquisition costs continue to rise: average industry CPAs of $700 are pushing acquisition payback periods beyond five years for the first time.

High-Level Mass Market Segment Profitability | Before and After Fee Reform

Percentage of Profitable Customers
Source: 2022-2023 Regional Bank Analysis, Deposit Analyzer Deposit Benchmarks, FDIC Call Report Data
Considered Risks

Threats are apparent across different market segments. National banks may be positioned to endure some pressures thanks to diversified revenue streams from more mature wealth and investment banking divisions. They’ve also taken action to protect themselves through deposit suite construction. But many of these banks face risks elsewhere: according to the 2023 Curinos Shopper Survey, fintechs now capture 40% of relationships that churn annually – and over 90% of that acquisition is made up of the mass market.

Regional and smaller banks are more exposed to the mass market, currently struggle to scale marketing and are unlikely to make up for the dent in consumer banking revenues with profits from other divisions. Lacking the comprehensive and integrated product suite necessary to balance acquisition and relationship depth in line with growth objectives, they’ll need to make decisions around who to serve and how. 

Across the board, providers will need to carefully consider the fact that many of the varied models in market today are unlikely to be viable in the future. In essence, banks that offer primarily free deposit services are going to feel strained. How much depends on how they structure their waiver criteria.

Deposit Suite Analysis – Free Checking vs Waiver Construct

30 Leading US Consumer Banks
Source: Curinos Analysis 2Q2024
Ask the Right Questions

Much depends on each bank’s ability to optimize onboarding and retention programs to maximize customer value for those coming through the door today. On top of that, outperformance in consumer banking will likely accrue to institutions who consider a number of key characteristics:

Cohesive top-of-house consumer strategy anchored in target segment(s)
What levers is the bank engaging, by segment, to drive acquisition of more of the right relationships and to grow more over time?

Outperforming banks will need to leverage client-engagement tools by segment to ensure that they’re attracting the right relationships. Just as important, they’ll need to broaden and deepen those relationships over time, through nurturing and cross-selling.  

Defensible and attractive segment-level customer economics
If profitability shifts materially, how certain are you about the economics for customers walking through the door – today and tomorrow? What would more mass market customers mean to the bank?

To succeed, banks will need to reexamine their profitability models by customer segment and adjust them as appropriate. The customers walking through the door today may not meet the thresholds of a tomorrow stripped of reliable fee income. The low-cost deposits that the mass market represents will need to be weighed against their other sources of revenue that may be lost.

Crisp bank-consumer value exchange that supports and drives accretive customer economics over time
What is the right mix of products and services to drive value with the segment? Does our proposition and customer communication strategy result in the right level and type of relationship growth?

Build a value proposition and communication strategy that drive segment-level performance over time, bearing in mind that evolving economics may require a reassessment of the bank’s value exchange with consumers. What’s the right mix of products and services that will drive sufficient value to the segments that matter? What offers, propositions and type and level of nurturing will result in an optimized level of growth of the relationships that matter? The landscape is changing. What’s working today may be a recipe for stagnation or decline tomorrow.

If you’re not fully confident in your ability to acquire accounts or build a robust deposit product suite design, get in touch today.

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