Chapel Hill, NC, October 29, 2009:  The heydays of overdraft fee income are over, but proactive actions can minimize the impact of pending legislation and current trends in consumer behavior.

During their online seminar, Navigate the Changing Tides Impacting Fee Income, strategists Darryl McGee and Heidi Hahn of FIS Business Consulting outlined tactics implemented by FIS clients while adding industry observations and recommendations. The seminar was held October 27, 2009, hosted by OnsiteConference, Inc. a privately held research marketing firm located in Tampa, Florida.

Perhaps in response to the overdraft revision bills pending before the House and Senate, six of the largest U.S. banks have recently announced plans to revamp overdraft policies and pricing. Changes introduced by these banks share the features of a courtesy threshold and daily incident limits, although when the changes will be implemented and the policy related to those changes vary widely.

To underscore the need for all banks to be proactive with regards to fee income policies, McGee cited a recent comment by Rep. Carolyn Maloney (D-NY), who wrote in part:

“The steps announced by Bank of America and Chase to reduce the burden of overdraft policies on consumers are significant improvements and will be good for their customers…but what we need are consistent overdraft reforms for all Americans who have or open a bank account.” Rep. Maloney has also stated, “Consumers should have a right to decide what financial products they’ll buy, and control over their own financial accounts. That’s the principle behind my credit card reforms passed earlier this year, and we need to extend it to bank overdraft policies….”

McGee also observed that a few regional banks have started to implement overdraft changes, noting one program that now offers a daily rather than per incident fee.

Noting that the difficult national economy has impacted consumer spending behavior, McGee presented client transaction data. For FIS clients and other banks, payment transaction volumes fluctuated widely over the last two years but may be returning to levels seen in early 2008. The most dramatic change is that the dollar volume of the transactions is in definite decline. While consumers may be using debit cards and checks with the same frequency as in the past, the purchases are for lower amounts, according to McGee.

While consumers are spending less, bank retail deposits are clearly on the rise as consumers have exited investment decisions for the safety of banks,” observed McGee. He concluded, “All of this taken together is that overdraft fee income is in decline and likely won’t return to previous volumes anytime soon.”

McGee cited fee income changes from seventeen banks studied over the past two years, and found dramatic drop-off of revenue. The few banks that did show income growth did so by increasing their account base through acquisitions. “Consumers are simply making fewer transactions that result in overdrafts,” stated McGee.

To best counter the change in consumer behavior while being proactive in response to pending legislation, McGee and Hahn recommend the following general strategic directions:

• Focus on making money on payment services

• Leverage the value you provide as a supplier of payment services to both retail and commercial customers

• Maximize retention levels of core account customers

• Focus on the retention period for core checking account customers

• Realize a segment of your customer base will continue to either occasionally or habitually, accidentally or intentionally, overdraw their account

• Continue to re-examine NSF/OD policies and practices for both income and servicing enhancements that are competitive and justifiable to customers

As an example of an innovative product idea, McGee cited Fifth Third Bank’s recent introduction of a direct deposit advance service that allows access to up to $300 before the ACH paycheck deposit arrives. Other ideas banks are considering, according to McGee, include replacing incident fees with an annual fee, or a monthly fee that would replace a set amount of overdrafts per month.

McGee concluded that banks that stay ahead of the pending legislation and adopt more benign pricing strategies may be at a competitive advantage. “The bottom-line is that you need to, now, justify your pricing and policies in anticipation of government action,” stated McGee.

Hahn observed that when re-evaluating fee income opportunities, free checking may be less feasible going forward. Based upon her work with FIS clients in the $5 Billion to $20 Billion range, successful sales and marketing tactics to boost non-interest income generally may be grouped into the following categories:

• Not So Free Checking

• High Interest Checking

• Value Added Packaged Accounts

• Re-Pricing Payment and Ancillary Deposit Services

• Debit Card Usage Incentives

• Debit Card Targeting

• Prepaid Debit Cards

While general tactics may be similar, Hahn stated her clients vary greatly with respect to internal implementation. “The overall tactical outcome, however, should be to retain and cross-sell to your customers,” she stated.

Regarding long-term strategic planning for improved fee-income, Hahn suggested several best practices. “First, assess your marketing function to more fully realize all the information held within marketing. Typically, marketing provides your best source for new ideas for revenue sources, data about your competition and the potential for new markets,” she observed.

Second, Hahn recommended the creation of a strategic marketing planning team as part of the strategic planning process. “This would be a cross-functional team focused on sales and marketing including members from all areas of the bank including IT and senior management,” commented Hahn.

“One function of this planning team could be to identify growth markets and even define your key product mix based on market demand,” stated Hahn. Planning teams that Hahn has supported worked to develop market-based pricing, customer segmentation based upon product usage and surveys, and evaluated projected product demand in new markets. Improved management reporting, containing information that may be shared throughout the organization, could also be an outcome from the strategic marketing planning team.

“Understanding your pricing as well as your competitors’ pricing can lead to uncovering new fee opportunities,” Hahn observed. She added, “Your best opportunities may be to leverage the information you gain from evaluating growth markets, demand, and your various customer segments.”

“Training should also be a long-term revenue enhancing strategy,” observed Hahn. “It is important that staff use consistent language to present and talk about products and services,” she added.

Hahn also recommended that, “There needs to be in place a discipline for product development. You can begin by understanding the ROI for each product. For new services, you will want to be consistent in how you define and assess how each new product impacts technology systems including core processing, teller and new account platform systems, as well as to identify and assess legal/compliance issues.”

Customer communications is also an important long-term strategy to enhance non-interest income, according to Hahn. “The assessment and monitoring of customer perception of any new fees allows marketing to pro-actively provide tips to management and front-line staff to better manage customer questions or concerns,” she offered.

White papers from FIS covering these and other revenue-enhancing strategies may be obtained by contacting either presenter:

Darryl McGee, Vice President and Managing Director, FIS Business Consulting at his office 972-666-2349, or at Darryl.McGee@metavante.com

Heidi Hahn, Senior Marketing Consultant, FIS Consulting and Professional Services, 414-815-4829 or heidi.hahn@metavante.com.

FIS Consulting and Professional Services is a merger of Fidelity National Information Services and Metavante Technologies, Inc. Visit FISglobal.com for more information.

For Onsite Conference, Inc., contact Kevin Archer at Kevin.Archer@OnsiteConference.com, or 813-925-1832.