Bank Fees Don’t Have to be the New Normal: 4 Ways to Bolster Profits

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Financial debacles have surprised investors since the 1990s.  In the current low-interest rate, high-regulation environment, Bank of America (NYSE: BAC) caused the most recent snafu:

Bank of America retreated last fall from a monthly $5 debit-card charge following a customer revolt and a wave of criticism in Congress.  The reversal, one of the worst fee debacles for a major lender since the 1990s, narrowed the bank’s options for new sources of income.

In a copy-cat move from last year, Bank of America decided to stave off the fees for yet another year to keep its customers happy.  The issue is that profits across the industry are hurting, an obvious result of heavier regulation on banks, decreased proprietary trading, low interest rates, and tepid growth.

JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC), and Goldman Sachs (NYSE: GS) also suffered casualties.  According to The Wall Street Journal:

Many other big banks, including J.P. Morgan Chase & Co. and Wells Fargo & Co. have rolled out plans that aim to raise fee revenue or push customers to do more business with them as low interest rates, slow economic growth and tough new rules limit bank profits.

I wrote about many of these problems in my post: “It’s NOT Time to Buy Banking Stocks.”  JPMorgan and Wells Fargo, for example, saw a large chunk of last quarter’s profits come from mortgage refinancing.  JPMorgan reported that 75% of its Q3 mortgage volume came from refinancing, and Wells Fargo said that 72% of its applications were for refinancing.  The problem is that those earnings are non-recurring, and many customers have already locked in new interest rates for the long haul.

Housing may have turned a corner, but the mortgage refinancing party is coming to an end.

Goldman Sachs also faced headwinds.  New regulation is forcing the bank to rethink its traditional profits centers.  To boost its own profits, Goldman rolled out plans to ramp up lending to the wealthy, with a goal of eventually making $100 billion in such loans.  The plan will fill some of the profit gap – but certainly not all of it.

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Two-Year Return Data

Bank’s Customer Problems

No doubt you’ve heard about the Pareto Principle, where 20% of the causes represent 80% of the effects.  The Pareto Principle appears to apply to retail banks.  About 20% of Bank of America’s customers, for example, cost the bank money.  Typically these customers earn less than $50,000 per year, which is about the median earnings in the U.S. 

The problem is that these customers often keep low checking balances and use few, if any, of the bank’s products.  The result is loss of “a couple hundred dollars a year” on these customers.

The sticky part is that the common retail banking business model doesn’t allow banks to “fire” the customers they don’t want.  There are two reasons.  First is a publicity nightmare, much like Bank of America faced in 2011.  Other banks are not immune – SunTrust Banks (NYSE: STI) recently canceled planned debit card fees.

The second reason is because people earning less than $50,000 per year and not using the bank’s products could later become profitable customers.  For example, take a young man who earns $49,000 annually and lives in an apartment.  Within one to three years, this same man could have set up a $5,000 per month direct deposit and may have a mortgage.  Thus, Bank of America cannot alienate customers who cause a loss now but have the potential to be profitable in the future. 

Solutions

Bank of America is generating ideas to bolster profits and nix fees.  I will be on the lookout for Bank of America, JPMorgan, SunTrust, and Wells Fargo to implement four specific actions:

  1. Monthly Direct Deposit – Bank of America hopes to set up a $250 monthly direct deposit for a bulk of its customers.  Other banks should push for the same.  With a direct deposit in place, banks have greater certainty of customer assets, allowing them a more stable lending base.
  2. Upsell Loans – Banks can increase revenues by signing customers to credit lines, school loans, and other loan products.  With interest rates so low, banks will need to make a volume play and sign up many customers to reap meaningful revenues.
  3. Mortgage Loans and Refinancing – The bulk of refinancing is behind us, but banks can still ink the stragglers into a mortgage refinance.  Also, banks must be certain to sell mortgage products to their young customers, which would lead to a long-term relationship with those customers.
  4. Adoption of Mobile Banking – Bank of America CEO Brian Moynihan says that 11.4 million customers use its mobile app, and that the app adds 10,000 new users per day.  Mobile banking is not likely to increase revenues.  However, mobile banking is more likely to decrease costs because of automation.  According to The Wall Street Journal: “Mr. Moynihan believes if the bank can reduce costs through mobile, it can avoid charging fees for things like overdrawing an account.”

Conclusion

Banks are stuck between a rock and a hard place.  SunTrust, JPMorgan, and Wells Fargo dropped planned debit card fees.  Bank of America canceled fees – again.  The refinancing wave is largely behind us.

To succeed in the current era of “increased-regulation banking,” banks will need to turn extra profits from their retail banking units.  And to turn these profits, banks need to move towards “break-even” on their most costly customers.  Otherwise banks may have to charge fees, which could alienate customers and harm shareholder returns.

 

 


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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