Banks, Credit Unions Aim To Cash In On BofA Fee Flak
It’s not every day that your biggest competitor gets hit with regulations that force it to charge customers more money.
But that’s the position area banks and credit unions find themselves in after Bank of America’s recent announcement that it would soon implement a $5 monthly fee for some checking account customers who use their debit cards.
Competitors see an opportunity to draw away Bank of America customers through different marketing strategies.
A recent mailing from Marlborough-based Digital Federal Credit Union, the largest credit union in New England, depicts a man getting punched in the face, cheek contorted, glasses askew.
Highlighting DCU’s free checking account offering (which, like many checking accounts, comes with a debit card), the mailing asks: Are you still getting fee-whacked by big banks offering small benefits?
The ad is one of the more direct examples of a competitor going right after Bank of America in a moment of vulnerability.
Tim Garner, DCU’s senior vice president of marketing and strategic planning, said the ad is directed at all big banks that are charging fees for what were once seen as basic consumer services.
“It’s certainly a little humor,” he said. ”I think it’s getting some attention.”
DCU has been honing its free-checking message since early this year, when Bank of America restructured its checking option to introduce more requirements to avoid monthly fees.
The credit union also just launched a promotion that pays new checking customers $5 each month for the first three months after they open accounts. Garner said the timing is no coincidence.
“Where the other guys are charging, we’re going to pay,” he said.
Regulations Blamed
Betty Riess, a Bank of America spokeswoman, said recent regulations have changed the economics of offering a debit card.
“This new fee allows us to continue to offer the service and convenience customers have come to expect from Bank of America,” she wrote in an email.
Those services include fraud and overdraft protection, record-keeping and savings programs, she said.
Riess said there will be no fee for customers who use their debit cards at an ATM, and that premium accounts, which offer better interest rates and perks in exchange for higher balances, will not be charged the fee.
The bank has already seen declines in its card income, which includes fees for bounced check fees, insufficient funds and monthly maintenance, according to Brian Riley, a senior research director for Boston-based TowerGroup who studies retail banking cards.
Riley said the Credit Card Act of 2009, which restricted risk-based pricing by banks, and another 2009 regulation that placed restrictions on bounced check fees, have hurt Bank of America’s revenue.
Revenue for cards fell to $1.9 billion in the third quarter of this year, compared to $2.5 billion in the second quarter of 2010.
Additionally, regulations contained in the Dodd-Frank Act that took effect this month pose approximately $2 billion in additional risk through the capping of debit card swipe fees, Riley said. The provision applies only to banks with $10 billion or more in assets.
TowerGroup projects Bank of America customers will do $260 billion in debit card transactions this year. Now, the bank will charge merchants 24 cents per transaction on average instead of 44 cents a year ago.
The reason Bank of America is getting so much national attention for its move is because of its size and influence in the industry, said Riley, who predicted others will follow.
“There might be some undercutting over time, but you can expect to see others generally migrate towards higher fees, even if the bank is exempt from Dodd-Frank because of their size,” he wrote in an email.
Not Alone
According to a recent Bankrate.com survey, 45 percent of U.S. checking accounts are free with no strings attached, down from 65 percent last year and 76 percent in 2009. Strings may include such requirements as maintaining minimum balances, setting up direct deposits or agreeing to receive electronic bank statements rather than paper.
Bank of America is not the first to test debit fees. J.P Morgan Chase & Co. and Wells Fargo & Co. are testing $3 fees in some markets.
“Realistically, what these banks are doing, this is not an evil process,” Riley said. “They’ve had a lot of money taken away from them. How you cover that gap is what they’re focus is.”
J.P. Morgan and Wells Fargo don’t have a retail presence in Central Massachusetts. So the debit fee is new here.
Of course, not all banks can boast of no-strings checking products in the wake of the bank’s fee announcement, especially some of the largest banks in the area. Though no bank in Central Massachusetts charges a debit fee like the one announced by Bank of America, many do charge a monthly fee for basic checking services; or they require customers to keep a minimum balance or enroll in direct deposit and other programs to avoid the fee.
Banks with 10 or more Central Massachusetts branches that charge a monthly fee or require a minimum balance to avoid one include: Sovereign Bank, TD Bank, Citizen’s Bank, Middlesex Savings Bank and People’s United Bank. (These fees do not impact customers with senior citizen or student checking accounts.)
Virtually no credit union in the area charges monthly fees for basic checking accounts.
Leaning On Advertising
Institutions with free checking products are trying to determine how best to attract customers through advertising.
JoAnn Morency, senior vice president of retail banking at Worcester-based Commerce Bank, said free checking has been one of the bank’s mainstays for years.
So how will Commerce play its hand?
“We might intensify some of our marketing,” Morency said. ”We might try to pick it up a bit, but we’ve always been advertising. It’s not like ‘Oh my God, let’s go after this.’”
Marlborough Savings Bank is using its websites and social media to spread the word that it doesn’t charge fees for basic checking services, said Ellen Dorian, senior vice president of the bank.
“Other banks have gone fee crazy!” a top item on the bank’s website reads in bold red letters.
The message continues: “Fees for having a debit card. Fees for using a live teller. Fees for getting your statement. But don’t worry. We’re not like other banks.”
Dorian said Marlborough will be shifting its advertising focus from low mortgage rates to its free-checking products.
“We’re looking at this as an opportunity to hopefully show the difference between a big bank and a small, community bank,” she said.
Fitchburg-based Fidelity Co-operative Bank is also shifting its message from mortgages to checking, said Catherine Dillon, director of marketing and retail sales.
“Because of all this buzz in the marketplace, we are going to switch those ads to a checking message,” Dillon said.
Fidelity’s free checking account is an entry point for customers, she said. “I really do believe that it’s the initial step to a fuller relationship.”.
Some banks may be placing less value on low-balance retail customers because they’re not as profitable, but Morency, of Commerce Bank, said the economy is going to turn, and banks will be well served to have strong relationships with customers.
“Sure I want a high-balance customer, but we’re happy with regular-checking customers,” she said. “They’ll buy a car, they’ll buy a house, they’ll have kids. There’s always potential.”
Smaller financial institutions regularly mention that it was the irresponsible actions of bigger banks that helped spark the financial crisis of 2008.
And now those smaller banks and credit unions may well benefit from the regulations burdening larger banks.
There is some sense among bankers that the regulations could eventually affect them. Merchants may not be happy about accepting a debit card when the transaction fee is twice as high as it is for debit cards issued by larger banks.
Morency said she understands some banks are rethinking their business models. Banks and credit unions offer free services to customers, but they aren’t free for the institution.
“You do have overhead,” she said. “Somebody has to pay for it.”
Dillon, of Fidelity, said she, too, understands the challenge bigger banks face.
“I came from larger banks and I know the squeeze the new regulations are putting on banks,” she said.
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