By David Henry
United States - Jack up checking fees for bank customers who don't use direct deposit regularly. Replace tellers with self-service, touch-screen kiosks. Install new chairs and conference rooms to court well-to-do customers.
U.S. bank executives are handing down such orders to replace profits lost to recent regulatory reforms and low interest rates.
They hope these tactics will be more successful than Bank of America Corp's plan last fall to charge a $5 monthly fee for debit cards. The bank had to retreat amid howls of protest.
Having mostly stopped the losses from the financial crisis, banks are focused on lifting profits from levels below their own historic averages and those of many other industries.
Wells Fargo & Co, for example, has new account requirements that push customers to do more financial business with the company. Bank of America is testing new prices for basic services in three states. JPMorgan Chase & Co is installing digital tablets and advanced ATMs to reduce the need for tellers and nearly one billion pieces of paper a year.
These three banks hold one-third of U.S. consumer deposits, and their price hikes, cost cuts and marketing to the rich are likely to influence the way Americans bank for years to come.
Increasingly, customers entering branches will be steered toward machines, much like airport ticket counters. More meetings with loan officers will take place by video conference. And nearly everyone, experts say, will need to be wary of new fees and pricing schemes.
Some customers are upset. Laurie Wittges of San Jose, California, said she is struggling to pay higher monthly charges from Wells Fargo. Unemployed, she can't maintain the balance of about $2,500 that the bank now requires to waive her fees.
"There are a bunch of people like me who can't afford this," said Wittges, 50. She lost a job as an executive assistant when the company where she worked closed last year.
CHECKING IS NOT FREE
As happens every decade or so, banks are intensifying efforts to increase pricing power, attract high net-worth customers and apply money-saving technology. While banks no longer lose money as they did in 2009, their stocks remain under pressure and executives are eager to raise profits.
Bank profits are simply too thin now to attract investors, said industry consultant Bert Ely. Return on equity, a key measure of profitability, in 2011 was 7.86 percent, which is below the 28-year average of nearly 10 percent and perhaps two-thirds as much as banks need to compete with other industries for capital, Ely said.
The outlook for the next few years is discouraging. One-time accounting adjustments boosted banks' 2011 results, and will need to be replaced for banks to increase earnings in 2012.
Regulators are on course to tighten limits on how much banks borrow to leverage up profits. And while bank stocks have rallied in the past six months, they are not hitting new peaks. The KBW Bank Index of stocks is no higher now than in August 2009 even though the Standard & Poor's 500 stock index is up more than 30 percent.
The Dodd-Frank Act, the law designed to address causes of the financial crisis, has curbed banks to the extent that there are fewer customers who bring enough revenue to cover the cost of serving them. Banks are barred from charging as much in overdraft fees as before, and from collecting from merchants all the money they used to get for debit-card transactions. Revenue from lending out customer deposits is down because of lower interest rates and loan demand.
Some executives regret marketing free checking accounts in the past. "As an industry, we have communicated with a generation of customers that this is all free, and there are costs," Wells Fargo CEO John Stumpf lamented at an investment conference in December.
The average cost to provide a checking account through a bank branch, according to Wells Fargo and JPMorgan, is roughly $300 a year, including spending to open branches, build computer systems, create websites and operate call centers. On that basis, about half of all U.S. households are unprofitable to the banks, according to JPMorgan.
Even when customers leave thousands of dollars on deposit in accounts, banks often do not make enough money on the funds to cover the costs. For example, an account with $4,000 that JPMorgan could have invested last year would have generated only about $140 in interest revenue for the bank. That's based on the 3.51 percent average rate the bank received on interest-earning assets and does not factor in its cost to make loans.
To be sure, banks are not going to dump half of their accounts. Serving additional customers does not cost much once banks have set up operations. Incremental costs for things like checks, debit cards and additional deposit insurance are so slight that they are covered by about 90 percent of accounts, according to JPMorgan. The banks also know that once interest rates rise and loan demand returns they will make money on the marginal accounts.
NEW PRICE PLANS
But banks are making a shift. Across all banks, 45 percent of non-interest checking accounts are now free, down from 65 percent in 2010, according to a Bankrate.com study released in September.
Banks are searching for an extra $5 here and $10 there. Bank of America, for example, since last year has been testing a menu of account choices in Massachusetts, Georgia and Arizona. The accounts, for new consumers, cost $6 to $25 per month. Most of the accounts provide ways to escape the fees, but customers must keep a minimum balance or use a credit card.
Wells Fargo eliminated free checking for new customers in 2010 and is gradually ending it for existing customers. In early March, the bank said it will charge current customers in six East Coast states $7 per month, unless they keep a $1,500 minimum daily balance or make direct deposits of $500 each month. The bank has already made the change in 24 western states.
Wells Fargo CEO Stumpf also aims to convince customers to do more business with the bank, like take out loans and use investment services, to pay their way. "We can give them package pricing," Stumpf told investors. "It is a better deal for them."
To cut costs, Bank of America is closing branches. Wells Fargo said it may shrink branches and reduce the number of tellers.
JPMorgan is installing new technology in branches to cut expenses and, executives hope, attract profitable
customers.
"We'll have more room for self-service, more room for rich people and business customers," Todd Maclin, JPMorgan's consumer banking chief, said at an investor conference last month.
The bank plans to coach customers in online and mobile banking, he said. Advanced ATMs will cash checks and dispense currency in multiple denominations, reducing the need for human tellers.
In six branches where JPMorgan is testing self-service kiosks, check cashing with tellers declined 40 percent. "Paperless tellers," people equipped with computer tablet touch screens, saved time and reduced errors in five branches where they are being tested, the bank said.
JPMorgan expects to use video conferencing to allow foreign language speakers and investment and loan experts to talk with customers in multiple locations. Some 58 branches now have machines that issue debit cards on the spot to save postage and time. The machines will soon spit out credit cards, too.
Still, new equipment and mobile banking apps can only do so much. About 90 percent of retail transactions with the bank are already automated, Maclin said. While the remaining 10 percent of transactions tend to have especially high costs that can be reduced, the estimated $500 million in annual savings falls short of the $800 million JPMorgan said it is losing to new regulations on consumer accounts and debit cards.
Bank of America CEO Brian Moynihan said in an interview that what is different for banks from past profit squeezes is that there are more ways to provide cost-effective services to customers, such as mobile banking.
That may be, but banks have failed with some technology investments in the past. In the late 1990s, First Union Corp, a North Carolina-based regional bank, flopped with a strategy called "Future Bank" intended to push customers away from tellers to phones, ATMs and computers. Customers grumbled about long waiting lines for tellers and in-branch phones that connected them to distant call centers. First Union lost deposits and had to rehire tellers.
Maclin of JPMorgan Chase vowed his bank will be careful as it pushes ahead. "We're not going to torture people in the process of getting them to go to self-service," he said.
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