Transcript Slide 1

Growing Non Interest Income
with Fees Consumers Willingly Pay
Charles Gearhart, Salin Bank
Bob Giltner, Velocity Solutions, Inc.
February 18, 2013
Contents
•
•
•
•
Introduction: Salin Bank
Fee Revenue Strategy
Fees Consumers Willing Pay
Conclusion
Introduction
Salin Bank is a $850 Million Bank in Indianapolis, IN
• 24 Branch Locations
• 30,000 Checking Accounts
• $4.1 MM in Service Charges on Deposits
Key Service Charge Revenue Strategies:
• Implemented Dynamic NSF/OD Limits
• Implement Targeted Debit Use Incentives
• Aggressive Acquisition and Referral Program
• 2013: Considering Tiered NSF Fees and Small
Dollar Loans
Fee Revenue Strategy
Fee revenues on transaction account activity are
up nearly 15%! ….but not at banks.
2008
Billions
2012
$82B
$70B
$48B
$44B
FDIC
Service
Charges on
Deposits
Source: FDIC, Our
Analysis; Banks and
CUs
FDIC Service
Charges on
Deposits
FIs
FIs, PayPal,
Billers, Others
Fee Revenue Strategy
We would be well-served to understand revenue growth
from both FI and non-bank perspectives.
Revenue Strategy
1.
Action Plan
Target fees according to
consumer willingness to pay for
what they value.
1.
Grow overdraft revenue
through improved service and
segmentation.
2.
Grow usage revenue by
enhancing transaction context
and experience.
2.
Use similar tools to penetrate
the market of similar size for
payment liquidity services.
3.
Make account acquisition
revenue as important as current
account revenue.
3.
Add revenue with debit use, and
premium services providing
contextual value.
Fee Revenue Strategy
The key revenue sources, for financial institutions and non
banks, are overdraft and “payment liquidity” service fees
rather than monthly account fees.
Billions
Non
Bank
2012
$82B
$56B
Key Sources
FI Maintenance Fees
$29 B
How much do you pay
in monthly check fees?
- Nothing
69%
- $3 or less
14%
- > $3
17%
Payment
Liquidity
$38B
$44B
Bank
FDIC Service
Charges on
Deposits
Source: FDIC,
Our Analysis
$27 B
Source: ABA/Ipsos 2012 Study
NSF/OD
FIs
FIs, PayPal,
Billers, Others
Fee Revenue Strategy
Consumer response is well-documented and has been
unequivocal in shifting away from maintenance fee-based banks.
“The negative reaction to fees reflects customers’ irritation about paying for something they
didn’t have to pay for in the past,” said Michael Beird, director of banking services at J.D. Power
and Associates.
Deposit Growth
“Fees are a front-of-mind issue for consumers,”
Bankrate.com senior financial analyst Greg McBride said a March survey indicated 64
percent of Americans would consider switching institutions if checking account fees
increased. Among more affluent people, the figure was even higher.
7
Source: FDIC
Fee Revenue Strategy
Consumers wanting more assured methods of covering
shortfalls find paying biller late fees more attractive.
$56B
The Biller Late Fee Market
NSF/OD
$27B
Source: Our Analysis Census Data, FRB Boston Payments Study
Fee Revenue Strategy
Nearly 30% of households pay bills late, and half of
those pay 10+ bills late a year.
In the past 12 months, did you pay a bill after
the due date or miss a payment?
Fee Revenue Strategy
FIs need to segment and understand the needs of checking
account holders for liquidity services, and deliver a superior
alternative to payday lending.
$56B
NSF
27B
871 Million NSFs
(25% of Accts) x
$31 = $27B
1.4 Billion late
payments (28% of
HHs) x $16 = $22B
186 Million payday
loans (13% of HHs)
x $37 = $7B
Average overdraft is $60 and
average 12 items a year ($720) @
$31/item = $372 ($52 per $100)
Average bill is $95 and average
10 items a year ($950) @
$16/item = $160 ($16 per $100)
Average cost of a payday loan
of $250 x 8 per year ($2,000)
@ $37 = $296 ($15 per $100)
Fee Revenue Strategy
Non-bank “payments” competitors like PayPal’s Billfloat
are segmenting the largest industry revenue source with
deposit risk management.
Fee Revenue Strategy
Financial institutions must shift from providing
one service delivered in one way at one price.
We need to move from one
standard product at one price…
…to multiple products, sizes and
prices.
Fee Revenue Strategy
CFPB and Regulatory Summary
Regulatory interests can be defined:
• CFPB – Emerging for large FIs (payment order,
misleading or unfair practices, mistreating low income
or young)
• “Appropriate action should be taken to address any
risks that are identified including excessive usage,
disproportionate impact and nonperformance, such as
… adjusting credit terms, fees or limits….”
• Set overdraft limits appropriately and justifiably.
• Document information for regulators showing who the
heavy users of overdraft services are and their
preferences.
Fees Consumers Willingly Pay:
Overdraft and Liquidity Services
Users of overdraft and liquidity services have
different needs and service desires.
Consumer Need
Sample Bank
Your
Service
Heavy
NSFer
10+ overdrafts fee users pay
$1,100 a year in fees; 7% of
accounts; want items paid;
low per item price sensitivity.
Only OK
Service
Rare
NSFer
1-3 items a year pay $60 a
year in fees,12% of accounts;
may opt out; high per item
price sensitivity.
Poor
Service
Non NSF
Liquidity
Borrower
20%
30%of accounts; opt out;
low credit score; focus
on alternatives to OD.
No
Service
Fees Consumers Willingly Pay:
Overdraft and Liquidity Services
Dynamic limit management, based on deposit activity,
improves regulatory compliance, customer service and
revenue, recapturing debit declines.
Sample Regional FI with Deposit Tracking
Community
FI
Fees Consumers Willingly Pay:
Overdraft and Liquidity Services
With improved limit and service management, tiered NSF in
use since 2008 provides better service and more revenue.
Tiered NSF Fee Structure
Overdraft Fee
Fulton Bank, PA
Susquehanna Bank, MD
RBC Bank, NC
$39
$40
$41
“Many banks adopt tiered NSF fee
rate structure.”
Wall Street Journal, November 12, 2008
Community FIs with Tiered Fee Structures
•
MainSource Bank, Greensburg, IN
•
Landmark National Bank, Manhattan, KS
•
First Federal Savings Bank, Elizabethtown, KY
Fees Consumers Willingly Pay:
Overdraft and Liquidity Services
For example, one community bank charging $32 per item
lowered prices for nearly 70% of its accounts presenting
NSFs and increased revenue 16%.
Tiered Pricing Example
NSF/OD Items
Last 12 Months
1
2
3
4
5 - 10
11 - 20
21 -03
31 - 40
41+
Total
Accounts
3,289
1,519
931
654
1,796
824
273
115
133
9,534
Items
Current
Recommended
Presented Items/Acct Revenue $29.86
Pricing
New Revenue
3,707
1.13 $
110,691
$19.86 $
73,621
3,537
2.33 $
105,615
$24.86 $
87,930
3,289
3.53 $
98,210
$24.86 $
81,765
3,217
4.92 $
96,060
$29.86 $
96,060
15,314
8.53 $
457,276
$34.86 $
533,846
15,771
19.14 $
470,922
$37.86 $
597,090
9,161
33.56 $
273,547
$37.86 $
346,835
5,725
49.78 $
170,949
$37.86 $
216,749
12,999
97.74 $
388,150
$37.86 $
492,142
72,720
7.63 $
2,171,419
$
2,526,037
Increase: $ 354,618
16%
Fees Consumers Willingly Pay:
Overdraft and Liquidity Services
Why is it that we will provide a $700 overdraft limit to a
customer where we would not provide a $700 line of credit?
– Overdraft services are underwritten based on deposit
activity and right of offset.
– Low APR lines of credit have not been profitable.
How could this combination be re-priced?
Fees Consumers Willingly Pay:
Overdraft and Liquidity Services
Some FIs are providing small dollar loans with low
APRs and maintenance fee pricing via automated
websites.
Used deposit scoring
to underwrite small
loans.
Reg. Z excludes
“participation or
membership fees”
from interest
Fee-based checking
service:
• Earn triple rewards
• Cash back offers
worth hundreds $$
• Automated small dollar
loans for 1.25% for 30 days
19
Fees Consumers Willingly Pay:
Usage and Premium Services
The most significant opportunity in the near term
is to improve and “own” the relationships we
already have.
Fees Consumers Willingly Pay:
Usage and Premium Services
The key to revenue growth is to have actively-engaged
transaction accounts. The debit card is the single best
indicator of engaged transaction accounts.
Fees Consumers Willingly Pay:
Usage and Premium Services
Your highest return opportunity is “onboarding” existing
accounts so you are their primary financial institution
which increases revenue and relationships per account.
Nearly half of your accounts are non debit
swipers or light users and swiping elsewhere…
…and getting them to swipe
with you drives revenue.
Increasing swipes among non
and light card holders adds
$56/yr per responding
account.
Source: Velocity Solutions Sample Client Analysis
Fees Consumers Willingly Pay:
Usage and Premium Services
What are new revenue sources consumers
are willing to pay for added contextual value.
Examples:
Wine with dinner
Contextual Drivers
Revenue Sources:
• Location
• Service Fees
Popcorn at a theater
• Timing
• Third Party
Revenues
(network effects)
Overdraft services
• Information
• Simplicity
Fees Consumers Willingly Pay:
Usage and Premium Services
Introduce contextual value through premium services
that can be added to any account.
Premium Service Pricing
• Overdraft revenue is an example
of successful contextual revenue
• Characteristics are:
• Can be added to any account
• Consumer action drives
revenue
• Majority forego service
• Willing users drive revenue
Fees Consumers Willingly Pay:
Usage and Premium Services
For example, you can easily ride the growth in prepaid
by simply re-configuring a checking account.
80% of Prepaid Card Users Have
a Checking Account
Over a checking account configured
like a GPR Prepaid Card:
• Prepaid Check Card
• $5.95 a month
• No overdraft fees ever
• Load with online banking, ATM
deposits
Fees Consumers Willingly Pay:
Usage and Premium Services
Below are examples of how FIs are implementing contextual
value strategies to drive premium service revenue.
United Community Bank Offers PFM
for $2/mo.
Zions Bank: Three Levels of Online
Banking
Mercantile Bank of Michigan has 30% Sign Up for
$4/month “Positive Pay” View.
Banco Popular Offers $25 Premium
Rewards Debit Card
Oregon Employees CU Offers Doxo Online
Filing Cabinet.
M&T Bank Offers Credit Score
and Online Banking for $2/mo.
CommunityONE Offers
Premium ID Theft
$15/mo.
Fees Consumers Willingly Pay:
Usage and Premium Services
And so are a lot of non-FI competitors…
Scan & Pay
Fees Consumers Willingly Pay:
Usage and Premium Services
The Internet, electronic payments and information network
are moving contextual value, revenue and relationship
management to competitors outside the FI checking
account.
Payment Networks:
(PayPal, Google,
Dwolla)
Aggregators
(BillFloat, PinPoint,
Mint, BillMyParents, Banno)
$
Acct Contextual Value
FI Checking Acct
• Revenue
• Relationship
• Risk
• Regulatory
Compliance (ID)
$
Billers and Services
(Online/Phone Payment;
Manilla, Doxo, Volly)
$
Merchants
(Walmart, Target, Home
Depot)
$
$ Telephone
(Isis, Boku, Verizon, AT&T)
Fees Consumers Willingly Pay:
Usage and Premium Services
This is the most significant impact of “mobile” growth: it
vastly increases the contextual value of networked
information that can occur outside the “account.”
10 Times Growth
Contextual Value Drivers
• Location
• Timing
• Information
• Simplicity
Source: The Economist
Fees Consumers Willingly Pay:
Usage and Premium Services
Many are targeting transaction information that creates FI
revenue through merchant advertising revenue. Some
predict revenue as high as $35 per all accounts.
Firms Targeting Merchant
Marketing Revenue
Project of Merchant
Marketing Revenue
Aite Group Merchant Revenue
Projection
Source: Aite Group, 2011
Fees Consumers Willingly Pay:
Usage and Premium Services
FIs are under attack by competitors providing networked
contextual value, stealing revenue from our “accounts.”
Don’t lose your debit dominance.
“In-store payments are
PayPal’s to lose…”
Don Kingsborough, PayPal
Will Debit Continue to Lead In-Store
Payments?
50%
42%
26%
19%
25%
5%
8%
0%
Debit
Credit
Card
Cash
Check
Other
Conclusion
We would be well-served to understand revenue growth
from both FI and non-bank perspectives.
Action Plan
Winning Trends
1.
Target fees according to
consumer willingness to pay for
what they value
1.
Grow overdraft and payment
through improved service and
segmentation.
2.
Grow usage by enhancing
transaction context and
experience.
2.
Use similar tools to penetrate
the market of similar size for
payment liquidity services.
3.
Make account acquisition
revenue as important as current
account revenue.
3.
Add revenue with debit use, and
premium services providing
contextual value.
Conclusion
Salin Bank is a $850 Million Bank in Indianapolis, IN
• 24 Branch Locations
• 30,000 Checking Accounts
• $4.1 MM in Service Charges on Deposits
Key Service Charge Revenue Strategies:
• Implemented Dynamic NSF/OD Limits
• Implement Targeted Debit Use Incentives
• Aggressive Acquisition and Referral Program
• 2013: Considering Tiered NSF Fees and Small
Dollar Loans