When making a New Year's resolution, one recommendation that often emerges is to make sure your resolutions are reasonable and obtainable in order to have the best chance of success. We agree, which is why, in a move for greater bank profitability in 2011, we promote a goal of taking a step in the right direction. Instead of making a majority of accounts profitable in 2011, we are recommending just
making a portion of your accounts a little less unprofitable. In order to take a step towards that goal of taking small steps, we highlight an innovative feature that a Midwestern community bank uses to accomplish better than a 12% ROE.
Commerce Bank ($19B, MO) recently introduced their new myDirect Checking account (http://tiny.cc/BIG_mydirect) that is worth noting for product development. This basic account bundle comes with online banking, bill pay, credit/debit card, mobile banking and is free, as long as the account is "active." The "active" definition includes any withdrawal, deposit, ACH or bill payment within the month. Should no activity take place, then the account is assessed a $3 monthly "inactivity fee." The account pays no interest and is designed to be paperless, in that every paper transaction, such as a check or deposit slip, costs $2 in addition to a $2 charge for a paper statement.
While most banks charge a monthly fee, the average of which in the nation is now $8.30 per month, Commerce Bank created a new approach. Instead of a set fee or a minimum monthly balance, the Bank is experimenting with this inactivity fee that will hopefully inspire the customer to utilize the account, thereby building balances, generating interchange revenue or incurring credit charges. If the Bank is wrong on this assumption, it has covered itself by charging for the items that create an unprofitable account - namely the processing of items and the generation of paper statements.
In creating this retail account, Commerce Bank has done something unique. Instead of ensuring that they make this account type profitable, they have designed the next best thing - a cost neutral account. The $3 inactivity fee basically ensures the Bank breaks even and covers its direct costs of maintaining the account; while the per-check and statement charges ensure that the account type is not a cost center. From a marketing angle, MyDirect Checking puts the power in the customer's hands by giving them a simple goal of minimum account activity to ensure the account is free. Another thing that the product does is to drive the customer to more efficient online and mobile channels and away from a costly branch network (see yesterday's BID).
If you are looking for incremental steps to take in order to make your bank more profitable, consider the middle ground of an activity charged checking package. By moving a large section of unprofitable retail accounts to a cost neutral basis, overall performance for 2011 can be enhanced - a small step to a greater resolution.