Obamavilles, food lines for lattes and women that look like Harry Dean Stanton may be in our future as Americans, but it won't be without a fight. For the first 4 months of the year, the nation is trying its best not to succumb to abject poverty by dropping consumption and increasing the savings rate. For the first time since 1996, our quarterly savings rate is above 4%. This is an improvement from the 0.4% we averaged for much of 2006. As a result, a trend that we wrote about last year - structured savings accounts tied to debit card usage for retail customers - remains on fire and is still one of the fastest growing sub-product categories in banking.
Last month, First Citizens Bank ($17B, NC) released their FreeMoney Bonus Program ( http://www.firstcitizens.com/freemoney/) that is the latest in the trend of debit card cashback rewards programs similar to Bank of America's Keep the Change or Wachovia's (Wells Fargo) Way2Save. We report on this as it has a slightly different structure than either BofA's or Wachovia's program and is the first large scale community bank entry into this product category.
While last year we reported the strong 20%+ risk-adjusted profitability on this product (for BofA's program), this year, as rates have come down, many of these products hover in the 11% range. While balances contribute less to profitability in 2009, interchange fees are more crucial, thus helping support profitability. More important, getting customers to use debit cards creates profitable long-term habits by sparing item processing costs and increasing customer loyalty (debit card users are 4x less likely to defect than savings-only customers).
First Citizen's shifts the profitability equation, in that instead of Bank of America's $250 limit or Wachovia's $300 limit, First Citizens has the highest bonus limit of $500 per year. Few accounts are expected to hit this level of usage so the limit is largely a smart marketing strategy. Unlike BofA which rounds debit card transactions up to the nearest dollar to transfer to a savings account (with a matching element) or Wachovia's percentage match of dollars saved, First Citizen's gives a $1 bonus for every non-PIN check card transaction over $25. By First Citizen's own calculations "Occasional" (about 15 qualifying transactions per month) debit card users should be able to earn $60 per year in a bonus, while "All The Time" (35 transactions/month) users should average about $180 annually. These figures are about 3x greater than what customers might earn for competing products.
When it comes to interest, First Citizen's pays 10bp on savings balances, which compares favorably (from the bank's standpoint) to BofA's 20bp. Of course, Wachovia pays an ultra-high 5.00% for the first year, but that is just crazy and largely detracts from the initial profitability of Wachovia's product (we think Wells will shortly do away with this practice).
The outcome of this product is First Citizens gets a media-positive product to build savings balances, while incentivizing customers to boost fee income for the bank. History shows that savings increase for 2 to 3Ys after a recession, so this current environment is conducive to innovative savings account / debit reward programs. Community bankers may want to consider adding this type of account to their product line-up in order to increase profitability in a down economy (as well as help customers save). This is important, because, let's face it - no one wants to look like Harry Dean Stanton.