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.