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PCBB Banc Investment Daily December 11, 2013
Banc Investment Daily
December 11, 2013

Modifying Customer Behavior

We were in Washington DC not long ago and toured around the city using the Capital Bikeshare program. The weather was decent and motorists seemed pretty patient, as we trundled along on our beefy red bicycle. It's a well run program that has achieved wide acceptance in its 22 months with more than 2mm annual trips. As bankers work to come up with fee structures and service arrangements that fit their business models, we found some unique ideas in this bike program that may help, so let's take them out for a spin.
The bikeshare fee structure has annual and monthly memberships or day use, all with a base fee plus additional fees based on trip length. The only way a bike share program can function is if there are bikes in the stations, so the fees are structured so that the longer you ride, the more expensive it is. The first 30 minutes are free, and the second 30 minutes cost $2. If you run over the first 60 minutes, then add another $6, and if you go over 90 minutes add another $14 and so on. You can ride free for 30 minutes but it will cost you $22 if you keep the bike for two hours. This steep curve provides expensive encouragement to get the bike back in a rack ready for the next person to use.
This is counterintuitive to most bank fee structures because most of the time we think in terms of higher volume having a greater discount per unit. In this case the objective is a little different, and this approach may make sense for some kinds of bank accounts as well. Bank fees should be based on what it costs to provide customer service, so a base rate makes a lot of sense. But many banks use large account balances as the only means to determine whether to waive that base fee and other transactional fees. What about looking at activity, as it is a very important factor in determining the cost of providing service to any given customer? Do those balances really offset the costs? This will depend on the customer and their level/type of activity.
Fees can be used to encourage customer behavior that is profitable for your bank like debit card use, efficient like eStatements and mobile deposit, or to discourage activities that cost your bank money like paper statements and paper checks. You don't want to get too complicated in offsetting good behavior with bad, but make it a part of a fee structure - unlimited mobile deposits, costs for paper checks.
A big part of the success of Capital Bikeshare is because the infrastructure, both physical and technological, works really well (like an app on your phone that tells you which stations have bikes). However, this is not a no-brainer--a far less successful rollout took place recently in New York City, and in this case the technology was unreliable and the physical infrastructure of the bike racks has been harder to use.
As your bank reviews its technology, products and different account types, consider all of your fee structures and the customer interaction. Think in terms of encouraging certain customer behaviors, discouraging others and charging fees in such a way that is fair to customers but also covers your costs. Above all, be sure your technology works well, because no one wants to wrestle with a cranky bike rack in the rain and likewise will have little patience for a cranky teller in the branch.
If you are still not quite there, consider Citibank's sponsorship of the Citi Bike program in NYC as seen in the picture above. Their brand is plastered all over these bikes and credit cards are leveraged for payment--time to go for a bike ride.