Banking on customers: banks are becoming painfully aware that most customers cost more than they are worth

American Demographics, Feb, 1997 by Bill Stoneman

First Chicago, which attracted plenty of unfavorable attention in 1995 with its ideas for cutting losses on its most expensive customers, takes good care of the profitable customers. For keeping $2,500 in a checking account or $15,000 in combined deposit accounts, First Chicago customers get a half percent off on installment loan rates with automatic debit, free travelers checks, a free safe-deposit box, free computer banking, and half off on check orders.

MAKING CUSTOMERS PAY

In April 1995, First Chicago established a self-service checking account with a $3 fee for most teller-assisted transactions. The bank attracted national headlines and sparked a firestorm of outrage, but observers now say the problem was in the presentation, not the actual terms of the account.

As First Chicago has gotten past the public relations debacle, more than two-thirds of new checking accounts it opens in the Chicago area are self-service, says Robin Foote, senior vice president for retail marketing. Its parent, First Chicago NBD Corporation, will be rolling out the account in Michigan markets this year. Other banks throughout the nation are quietly introducing or considering similar self-service accounts accompanied by teller fees.

Many bankers now recognize that one of their greatest opportunities for raising fee income comes from simply sticking to their own rules. This means higher fees for overdrawn accounts or replacing a lost ATM card for less profitable customers. But traditionally, banks have had few criteria and branch officers waived such fees nearly as often as customers complained about them.

Many banks now also charge monthly service fees for checking and savings accounts when small depositors make more than a certain number of withdrawals, charge fees for making more than a specified number of telephone queries each month, and after hand-holding to sell customers on the benefits of electronic banking. "The solution to the unprofitable people lies in higher balances, higher fees, less usage, and fundamentally redesigned products," says Kuenne. "The bank is going to have to make some product changes. The consumer is going to have to make some behavioral changes. The industry will have to make changes in its cost structure."

Some of those changes are well under way. Noninterest income, which includes the many fees retail customers pay, has skyrocketed as a percentage of total operating revenue, from 7.5 percent in 1980 to 21.4 percent in 1995, according to the Federal Deposit Insurance Corporation. The higher fees, however, particularly for ATMs and live tellers, have politicians and consumer activists steamed. Two-thirds of respondents in a national survey of financial behavior conducted by the Gallup Organization and Bank Advertising News in 1995 said they would be very likely to switch their checking account to another financial institution if theirs began charging fees for teller visits.

RETRAINING THE CUSTOMER

Robert Barone says that Comstock Bank is not intentionally trying to push anyone out the door. But he concedes that raising fees for "C" customers may have that effect, and he does not lament the loss of their business. Other bankers may feel the same way, but they claim that teller fees are low on their agenda. Instead, they are focusing on persuading their least profitable customers to bank cheaper.