CRIMINAL FEE WAIVING

Now that Paris Hilton is behind bars, we can all breath a little easier. Before we breathe too easy however, keep in mind that we still have Britney running around and the issue of bankers waiving fees like never before. Historically, like the VIP rooms at trendy nightclubs, the waiving of fees for checking, money orders, travelers checks, notaries, stop payments and a host of other miscellaneous services have been reserved for all but the highest balance customers. After growing at an 8% clip for a number of years, fee income growth has slowed to a crawl (up 1.5% for 1Q). As of June of 2006, we started to see many independent banks go after high-net worth customers by waiving a majority of fees. Competition responded and many banks simultaneously dropped their definition of "high-net worth" to customers with a mere $100k in combined balances. By 3Q of 2006, many banks also started to increase the number of allowed NSF/ODs that an account could have before incurring any fees. Despite all of that, none of the fee waiving was institutionalized until last March when Washington Mutual released their restructured "WaMu Free Checking." The product not only gives away checking, but provides the following services for free as well: non-Wamu ATM charges, checks for life, safe deposit boxes, e-Alerts, rewards credit card, ACH fraud protection, Amex gift checks, Amex Travelers Checks, foreign drafts, money orders, notary, IRA trustee work and 1 OD/NSF charge per year. After one month of marketing, our discussion with their customers and employees reveals that the product is taking off. We are still researching Wamu's numbers for new customer acquisition with this product, but given the response we have observed at their branches, it is likely significant. The #1 thing we heard from new customers was that they came to Wamu because they hated paying fees and they trusted that the bank would not "play games with them." For banks looking to roll out a similar product, we just gave you 2 great points to stay on message. Of course, counter to this customer acquisition and retention strategy will be a significant give up in fee revenue. For most banks, this strategy will be a net money loser. For Wamu, with its first mover advantage, it has a high probability of paying off. We believe that over the next several months, retail-oriented banks will have to come up with a strategy to effectively combat this latest trend. Banks will either need to hold firm and risk losing customers (but maintain some semblance of fee income), match the offering with a similar bundled package (in an attempt to capture more of the market before it gets eroded away), or launch a counter marketing campaign highlighting the service aspects of their offering line up. Which strategy bankers choose largely has to do with proximity to a competitor offering a similar bundle and a bank's current retention rate/fee revenue stream.