What’s Keeping Banks Up at Night? – Part 2 in a Series – Disappearing Fees

As new fintechs encroach on the retail banking marketplace, offering more transparency in exchange for consumer trust, customers are waking up to the complex (dare we say, “hidden”) fee structure of their long-standing banks—and they don’t like what they see. In this second of our series What’s Keeping Banks Up at Night, we explain how banks can actually drive greater long-term value by putting the endless string of fees to rest.

Let’s be honest, for a long time now banks have been banking on the notion that consumers believe fees are “a given” for keeping their money safe. But it’s increasingly apparent that the proliferation of fees for minimum balances, ATMs and overdrafts are not so much about covering costs as much as they’re a way for banks to make literally billions in incremental profit: According to economic research firm Moebs Services, bank revenue from overdraft fees alone totaled a staggering $31.3 billion last year in the U.S.

Enter the neo challenger banks like Chime, which offers fee-free overdraft, and legacy spin-offs like Citizens Access, which boasts no fees for anything. Perhaps most significantly, banking giant Ally recently eliminated its overdraft fees altogether. There are legions of neobanks on the rise, each with their own strategy and niche, and they are changing the game.

Today’s banks need to recognize that fees aren’t just changing, they’re becoming obsolete.

Note that the reason the no-fee strategy of neobanks is resonating with consumers isn’t just about lower fees, but it’s also about what that approach represents: Putting the customer first.

Clearly, this is a pivotal point for consumer banking. Perhaps one that is way overdue. For years now a customer-centric approach has been the mantra for most of the retail marketplace. Banking should be no different.

Eliminating the overdraft fee is low-hanging fruit when it comes to a customer-first strategy, giving consumers a greater sense of control over their finances – particularly for those living paycheck to paycheck, which multiple studies reveal is increasingly the case for a majority of U.S. households; while a July 2021 survey puts the figure at nearly 40% of households in U.K. Even more, some challenger banks (like Chime for instance) are offering customers early access to their paychecks, which is essentially productizing the two-day float banks have always had. The optics are momentous: In this manner Chime positions itself as a company that understands the unique needs of their customers and proactively helps them manage their money and stay ahead of the game.

Banks are starting to respond, though their responses are generally not as dramatic as Ally’s bold move to eliminate fees. Examples include Capital One recently launching early pay features offered by popular challengers, and PNC now helping customers avoid fees by alerting them when their balance drops below $50 and again when it goes negative, giving these customers 24 hours to correct the situation before they’re hit with the overdraft fee.

A promising alternative is for banks to get more creative with what they know about their customers, and offer value-add solutions that may not be free but that definitely are not considered “just another fee”. Think about all the behavioral data banks have compiled about their customers. Now imagine if banks use this information to anticipate when customers are going to overdraft, alert them via their mobile app that their balance is low, and at the same time offer them a short-term, low-interest loan to carry them to the next payday. People are going to be much more receptive to a quick and easy, “one-click olive branch” than the prospect of yet another overdraft fee – enacted properly this could be a win-win for banks and customers alike.

The point is that banks can always find a way to make money in lieu of charging fees, especially if they view opportunities through the lens of their customers. This is how you make people feel better about your brand and create the kind of stickiness that leads to long-term loyalty and high customer lifetime values.

After all, while fees may provide an easy revenue boost, they may actually repel the customers you want to keep. In contrast, showing your customers that you care about their unique needs and situations can be priceless. Plot your strategy accordingly.

Click here to read Part 1 in this 2-part blog series