Our Viewpoint

Our Viewpoint

Choice is Good: "Build Your Own Checking Account" Options Help Change Consumer Behavior

January 11, 2013

It is an ongoing challenge for institutions of all sizes: how do you fill the revenue gaps created by Reg E and the constant wave of new regulations without antagonizing your account holders?

Large institutions learned that one abrupt move could create turmoil when they revamped their checking account portfolio to deal with the fee and non-interest revenue impact caused by The Durbin amendment to the Dodd-Frank Act.

Soon after these institutions were mandated to lower their interchange charges on debit cards, they quickly began eliminating their free checking programs. This abrupt change caused many consumers to search for financial institutions that appreciated their business – and offered free checking. To the community banks and credit unions they came en masse.

Had this been 2008, the smaller institutions would have welcomed these consumers with open arms, and probably given them a gift card just for opening the deposit account. But the world had changed, and these organizations were still struggling to make up for lost NSF fees and the impact of the overall economy. Although “free checking for all” was no longer a financially feasible option, most community banks and credit unions did not want to match the “keep a high balance or pay a substantial fee” strategy of their larger counterparts.

Joaquin Lopez, senior vice president and COO of First Community Bank in San Benito, Texas, a D+H PhoenixEFE® Core client, had a different idea.

What if there was a way for consumers to “earn” a free checking account by adopting certain behaviors – such as utilizing bill pay, e-statements and other additional services -- that either added value to the institution, increased non-interest income or saved it money by lowering cost?

“The concept of rewarding checking customers with a high interest rate defeated the purpose for us. We wanted to reward the customers who used more of our services – basically, we would use free checking to motivate them to change their behavior,” Lopez said.

His vision was the catalyst for the creation of the PhoenixEFE Flexible Checking module, and his institution became the first to go live with the capability.

The Rise of “Conditional” Free Checking

PhoenixEFE Flexible Checking lets institutions define eight specific conditions around eStatements, debit card use, ACH credit or debit, Internet banking use, bill pay or minimum balance or account requirements. Essentially, it enables institutions to create a “conditional” free checking program that offers consumers a choice of how they can obtain that free status.

First Community Bank, for example, took five of its most common services. If its customers used three of those services, there was no checking charge. If they did not want to do that, they also had the option of keeping a $750 balance in the account. Or, they could incur a monthly checking fee.

The real secret sauce of this strategy is that institutions give customers and members the “flexibility” of choice, instead of mandating a single set of requirements. With this approach, a younger consumer might opt for eStatements, ATM banking and mobile banking, whereas a more mature consumer might have an aversion to technology, but have no problem keeping a $2,500 balance in the account. Options can be turned on or off, based on the services offered and the demographics of the specific bank or credit union. The number of debit or credit transactions required can also be adjusted – and fine-tuned after the program begins.

Institutions benefit from increased stickiness and greater use of their ancillary service investments – which does not always happen today.

Look at your own institution. How many of your customers or members have opted in to bill pay, but never use it? How many people still want a paper statement, although tech savvy enough to be a regular on Internet banking? If you forced the requirement to use that service, you might have unhappy customers. But, if you give them the chance to earn free checking by using those services, you leave the choice up to them. You become the institution that is trying to save them money.

Anticipating Response

After introducing its Flexible Checking program, First Community Bank realized some very significant results. During the first six months of offering this flexible checking product, their fee income rose from $0 to $10,500 in checking account fee income – a substantial amount of fee income for a $200 million institution. Additionally, they reported a significant increase in eStatement adoption, growing to nearly 1/3 of their direct deposit customers. Did the institution experience checking account closures because of the fee or “earned” free program? It did – but that was a good thing.

“We had 500 direct deposit accounts close, but 48 percent of these were simply consolidations – customers with four checking accounts who, when we started charging, decided that they really only needed two,” Lopez explained.

But, how can other institutions feel secure that their customers and members will respond positively to Flexible Checking?

The best approach is to take eight behavioral changes, like using bill pay or adding a CD, and create reports that identify which existing account holders can meet three to four of the eight behavior changes. Using this analysis, the financial institution can determine the optimal level of services to bundle to create their flexible checking product. If your analysis reveals that most customers will attain the level of services already to avoid the charges, you will have little impact to new revenue. But if you can create a product that drives additional service utilization, those fees can easily make your customers much more profitable.

No question, regulations have changed the way banks and credit unions do business, leaving everyone looking for new ways to increase their revenue streams. As First Community Bank discovered, by taking a new approach to checking, you can recoup fee income, increase multi-product households and reduce operating costs. All it takes is a little creativity, and the willingness to give consumers a choice.


Tom Berdan
Vice President, Market Development

Tom Berdan capitalizes on his 25 years as a banker and 15 years in the banking software industry, using his expertise to serve as vice president of market development for D+H where he manages industry research and outreach. Prior to that, Tom served as vice president of product management where he oversaw D+H product roadmaps, including core systems, branch automation, self-service and business intelligence. Tom holds an MBA from the University of South Florida, Tampa, and a Bachelor of Business Administration from the University of Wisconsin, Milwaukee.