Money for nothing in retail banking

March 8, 2016 Michael Wallberg

Dire Straits couldn’t have known that their iconic 1985 hit could come to represent a disillusioned perspective of banking fees. Perhaps it hasn’t and I just made that up, but in any case, Colin Savage’s recent article criticizing the persistence of what he sees as increasingly redundant cash grabs did catch our attention.

The root of his argument – having moved to Canada from stints in Europe and Asia where fee-free banking is more commonplace – is that the notion of recovering costs for “Personnel, Policy, and Property” is an antiquated one. He points to the increased digitization of banking as a means of both cutting overhead and improving customer experience, then marvels at the inability of low/no-cost alternatives to gain traction in the Great White North.

Under the ‘old model,’ when bricks-and-mortar costs dominated all banks’ income statements, there was a linkage that customers could make between the fees they paid and the services they received. They were paying the salaries of the tellers that served them, they were paying for embossed bankbooks and leather waiting room chairs and even those apparently irresistible (and so, chained-down) pens.

From a retail banking perspective, especially in the last eight years as interest rates (and with them, margins) have diminished, the importance of stable fee revenue has never been more important.

But today, given the ubiquity of ATMs, mobile’s upward march with over half of smartphone owners using their phones for banking and over three-quarters of Canadians using online banking more broadly, the fee game has changed.

How should banks respond? Go totally fee-free?

Fee or free?

In short: no. The U.S. has gone through a cycle of completely fee-free chequing accounts which, perhaps surprisingly, was not actually that effective. We wrote previously about Aite’s study of the practice at community banks and credit unions in particular, which showed that “over a period of two years, the performance of high-yield checking accounts with a monthly fee trumped that of free checking accounts in a number of key areas, including growth rate, transaction volume, and revenue contribution.” In other words, people will pay for services if they perceive a value.

In our view, successful banks will read between the lines of what Savage is getting at: namely, customers are more sophisticated, they have more choice, and they expect to receive value for the fees they pay – or they’ll go somewhere else.


Banks need to think more strategically about fees and look at optimizing the value of the whole relationship.

Tying fees to value

There are many opportunities for banks to maintain fee levels, however, by tying them to the value that customers are receiving. And the starting point for many of them is banking software (like Zafin’s) that unveils a more sophisticated view of the customer – permitting banks to offer relationship pricing across a variety of channels and products.

Done right, this can actually work to the benefit of customers and banks alike when lower fees are used as incentives to influence (bank-desired) customer behaviours.

A few examples from our Relationship Banker archives:

  • Reward minimum balances. Offer a bonus interest rate on a checking account if a customer maintains a required minimum balance.
  • Incentivize behaviour. Offer a cashback or bonus interest reward if a customer exhibits a desired behaviour such as meeting spending and savings thresholds, achieving tenure goals, or making online bill payments or direct deposits.
  • Promote products. Offer discounted or free add-on services, such as third-party ATM fees, check order fees, stop payments and safety deposit boxes when a customer signs up for multiple products.
  • Focus on Lifetime Value of Customer. Chris Nichols wrote an excellent case study of Union Bank’s Priority Checking product, which illustrates a best-in-class approach to using conditions for fee waivers as a way to build lifetime value of customers.

When banks use their 360-degree view of their clients to make tailored offers like these, the client deepens his relationship and feels appreciated (and the depth of his existing relationship recognized) in doing so.

It changes the conversation from “What am I paying these fees for?” to “How can I benefit by helping the bank?,” a win-win for all involved.

This blog post was written by Mike Wallberg, Content Marketing Manager at Zafin. You can email him directly at

The post Money for nothing in retail banking appeared first on Zafin.

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