It Will Take a Paradigm Shift to Replace Lost Fee Income

The banking industry continues to change at an unprecedented pace and is being confronted constantly with new challenges. According to the 2010 ABA Bank Marketing Survey Report banks listed regulatory changes (39.9 percent) and growth and retention (22.9 percent) as the biggest marketing challenges they will face in the next 12 months.

The latest regulatory changes threaten to reduce debit card interchange income—challenging banks to re-examine their business model and their products and services. Banks have no choice but to create more effective strategies to make up for lost fee revenue without relying so heavily on low-cost checking accounts or rewards programs linked to debit cards.

These types of products attract deposits by offering no fees or paying a high interest rate and rely on overdraft and debit card revenue to make the relationship profitable. But accounts like rewards-based checking are likely to be less profitable as result of these regulatory changes—forcing banks to accept new realities.

New debit card legislation (which some say may reduce interchange revenue for some banks by two-thirds) and the recent “opt-in” regulations essentially will derail the revenue components of these accounts. That may leave banks scrambling to find the next “big” thing to help them make up for lost fee revenue and keep the customers they already do have.

Banks need to stop chasing after the next “can’t-miss” product designed to change customer behavior and focus on developing strategies around relationships and client interaction. Programs like debit-card rewards are extrinsic to the service offering and do little to reinforce the value derived from dealing with the bank. Instead, they simply encourage customers to modify their behavior and use their debit card more frequently.

Granted, these programs can be effective to help underpin the deposit growth strategies of a bank, but they do very little to help retain customers. And they’re successful only as long as they’re better than the competition. Should another bank introduce a better rewards product, customers will be naturally inclined to switch banks because the relationship between the customer and the bank is behaviorally driven, with no emotional bond.

Traditionally, banks have implemented these types of programs in efforts to build stronger customer relationships. However, while these types of programs may form a component of an integrated relationship marketing program, they don’t represent a strategic, customer-focused approach to relationship formation and retention.

Recent research on banking customers showed that service and relationships ranked high on the list of things important to customers. If you’re only offering a rewards program, that won’t be enough to keep your customers satisfied. Relationships—and retention—can only be built through constant, consistent, personalized and relevant communication. Otherwise, you’re essentially giving your customer a built-in exit strategy.

The challenge is getting banks to make a paradigm shift: from trying to influence customer behavior with incentives to believing that customers would be willing to pay more to deal with their bank if they simply provided better service and created more value for their clients.

The best strategy to counter these new regulations—and to rebuild and sustain profitability—is to develop stronger customer relationships. Banks will need to do a better job of identifying and meeting their customers’ needs so they can more effectively cross-sell additional products and increase retention. Doing so will play a big role in helping bridge the gap in the anticipated loss of fee income and potential for more loyal customers.