The Next Wave of Checking Redesign

While the value of the checking account is not in question these days, the design of it is. In the wake of the 2008 financial crisis and the subsequent regulatory crackdown, banks are scrambling to make the basic demand deposit account (DDA) more customer-friendly.

Unfortunately, in their rush to improve the product, banks have made some questionable choices that may come back to haunt them. A better approach, we believe, is to thoughtfully identify your key customer segments and which checking account design features are appropriate for those particular segments.

Starter Product

The traditional checking account remains a material source of profitability and low-cost funding for banks, even though the economics have declined in recent years and vary by customer segment. The DDA is definitely the leading starter product for new customers; if the initial experience is positive, the returns on targeted cross sales can be phenomenal, sometimes achieving over a 500% internal rate of return (IRR) on direct mail campaigns. The best banks enjoy greater profitability and loyalty from customers anchored by checking and related payments and information services, particularly if the value exchange for each segment is attractive and the service quality high.

In recent years, however, banks have grappled with two strategic issues related to the DDA. The first is how to serve paycheck-to-paycheck oriented households, which may represent between 40% and 50% of total customers. Many of these relationships are uneconomical with standard free checking products.

The second issue is differentiating the bank’s value proposition for customers with higher balances and the potential for attractive cross sales. In today’s depressed economic environment, such upper end customers are eagerly sought by all financial institutions.

In the first round of checking account redesign, banks took several different approaches, including:

• A range of monthly fee levels (from $3 to $20+) and waiver options, including minimum balances, direct deposit, or number of debit transactions;
• Variations in overdraft (OD) fee structures, including waivers for ODs below a low dollar amount threshold, reduced fees for smaller ODs, varied caps on the number of fees per day and extended grace periods;
• New fees for services that had otherwise been free. For example, a monthly fee for billpay, fees for writing checks or using the call center above a free amount per month;
• Customizable options where consumers are able to select their preferred features;
• Availability of enhanced features such as free foreign ATM access, surcharge rebates, linked accounts, waivers of other nuisance fees and availability of concierge services.

Add to this mix differences in face-to-face service experiences and/or self-service features, plus pay-what-you-wish pricing from new entrants, and it is clear that a prospective customer has many choices to consider. Yet, the results, for banks, have not always been happy. While some institutions experienced a minimal loss of accounts, mostly low-balance or inactive with low to negative marginal profitability, others have realized their worst case predictions of account attrition and sales decline.

Continuing Creativity

So, what’s next for the DDA? Creativity in this arena will certainly continue, spurred on by payments-related innovation. For example, consumers will be able to make use of new features related to rewards optimization, discounts and promotions that are a function of either their location or preferences derived from historical behavior. Other innovations will involve receipt management features that also conveniently facilitate reordering and purchase of extended warranties.

Differentiation will also appear as a result of banks offering products to targeted customer segments. Paycheck-to-paycheck households that rely mostly on cash will need services that can fill in the gaps between receipts and expenditures and help them discipline their spending via convenient access to balance levels, budgeting tools and linked products that encourage savings.

After working with numerous banks in checking account redesign, we have identified the following keys to success:

• Gaining agreement across the organization on the most critical objectives for the redesign effort, and their relative importance;
• Understanding which pricing levels/structures and features are valued by different segments and which are major irritants. The right sort of primary research can help define the next round of game-changing products and services by providing insights into the attributes most influential in customers’ buying decisions, including willingness to pay;
• Aligning the approach to checking product redesign with your bank’s value proposition. For example, banks emphasizing superior in-person experience would ensure that there is no penalty for personal interactions with bank representatives;
• Providing customers in different segments with real product choices, instead of offering a one-size-fits-all type of solution to their banking needs;
• Selecting an approach where the checking alternatives are simple to understand, do not have complex attributes or fee triggers, and are sufficiently differentiated from one another;
• Cleaning up grandfathered products and providing a logical path for each sunset product to a landing point in the new product line, all the while incenting households to upgrade or expand their relationship to minimize attrition of profitable accounts;
• Devising an effective approach for communicating changes to the front line and customers/prospects. We have found that what you say, and how you say it, matters greatly.

The benefits of successfully implementing a redesigned checking account are substantial, achieving a net benefit of between $4 million and $6 million per 100 branches in our experience. These benefits derive from higher fees and larger balances from customers that consolidate accounts and/or trade up to new products. Over time, the incremental income opportunity will increase as new products continue to roll out.

Mr. Gallagher is vice president and head of the payments practice, Mr. Goetzmann is executive vice president and head of the strategy practice, and Mr. McCormick is president of New York City-based First Manhattan Consulting Group. The authors can be reached at [email protected], [email protected], and [email protected] respectively.