Abstract
NEW RESEARCH REPORT BY MERCATOR ADVISORY GROUP
The first report from Mercator Advisory Group' s new launched Retail Banking
Practice explores the hazardous route retail banks are taking
disintermediating the loyalty of customers through overdraft fee maximization
and onerous, templatized, rewards programs.
Bank management frequently attributes the persistence of low-grade loyalty of
retail banking customers to the commoditization and ubiquitousness of banking
institutions and banking products and services. We find that a significant
component of customer disaffection corresponds to prioritization banks have
given to investment banking, securities trading and insurance underwriting.
While Q4, 2007 net income of the ten largest retail U.S. banks was - $6.4
billion (a Q4 2007 versus Q4 2006 change of $30 billion), those same 10 banks
have increased their annual check fee income to $7 billion.
While banks as a whole are awash in red ink, they have adopted an ultimately
self defeating course of optimizing overdraft fee income by holding checks for
2 to 5 days before giving customers access to funds and paying checks
largest-to-smallest to maximize the number of bounced checks hitting a
customer' s account. Concurrently, banks have begun marketing rewards programs
featuring unobtainable merchandise. For instance, a top 10 retail bank will
reward a customer with a "free" iPod nano after that customer spends almost
$400,000. on a signature debit card.
It is impossible for the stable revenues of retail banking to shoulder the
profitability mandate of the entire financial institution. Customers are
disgruntled and defecting and legislators and courts are assessing overdraft
loan fee income.
It is imperative that retail banks step down from maximizing the number of
non-sufficient checks and reassess their current customer rewards and loyalty
strategies. We believe that a competitive advantage will go to banks revamping
their retail income streams and assuming the mantle of trusted advisor. Those
trusted advisors who embrace fair retail practices, real-time virtual customer
service and social networking technologies will benefit from a huge upswing in
customer acquisition, loyalty and ultimately, profitability. Also, they may
avert legislative and judicial oversight of their retail-generated
non-interest income components.
Report Highlights:
- Totaling $17.5 billion industry-wide, retail bank overdraft loan fees are
principally responsible for the banking industry hitting an all time low in
the loyalty of retail customers.
- Rewards programs have evolved from their central roles as customer
acquisition and loyalty drivers to commoditized web-site graphic placeholders
featuring impossible to earn rewards.
- The rise of templatized, unattainable rewards programs has corresponded
with retail bank reliance on the generation of overdraft loan fee income.
Customers cannot earn rewards for their transactions, but those same
transactions may earn the bank bounced check fees.
- Overdraft loan fee income creates a windfall of customer dissatisfaction,
defections, negative press coverage and invites regulatory and judicial
scrutiny of largest-first check clearing and check holding policies.
- We estimate that the 10 largest U.S. banks generate $7 billion in
overdraft loan fees as a portion of their total non-interest income of $109
billion. These banks are incurring huge customer and employee goodwill costs
and jeopardizing a component of their independence for 6.4% of total
non-interest income.
- We predict that banks embracing the New Normal through real time virtual
customer interactions, social networking technologies and rationalizing their
overdraft policies will win profitable and fiercely loyal customers.
The report contains 23 pages and 5 exhibits.
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