As fee income changes, deposits become more important

Changes in the regulatory environment will make it more difficult for banks to rely on income from checking overdraft charges, said Robert Tetenbaum, executive vice president at First Manhattan Consulting Group of New York. Speaking at a breakout session at the American Bankers Association convention in San Francisco on Nov. 10, Tetenbaum said new deposits offer the best opportunity to make up for diminishing fee income.."The most important thing for affecting a bank's return on equity is its ability to attract deposits," Tetenbaum said. "Organic growth is the key.".The best way for a bank to measure its deposit growth is to compare same-branch totals quarter-over-quarter or year-over-year. Tetenbaum compared the measure to the one used by retail stores which gauge same-store sales on a monthly, quarterly and annual basis. Tetenbaum instructed bankers to consider retail deposits. For the sake of measuring deposit-gathering effectiveness, he suggested bankers not count large commercial deposits. "Concentrate on consumer deposits and small business DDA," he said..Tetenbaum said people often assume a bank office's deposits grow solely because the office is located in a growing area. "There is a lot more to it," he clarified..Furthermore, he said there is no correlation between free checking and same-store deposit growth. "Everyone has free checking and it does not attract deposits the way it used to," Tetenbaum said. Most balances in those free checking accounts are low, he said, and banks profit from those accounts primarily through charges for nonsufficient funds and overdrafts..Tetenbaum said 10 percent of a bank's customers typically generate 83 percent of its NSF/OD fees. They average an account balance of less than $1,300. Because the people who generate the most NSF/OD fees typically have low balances, banks that rely heavily on this kind of fee income have under-performed peers on same-store deposit growth, Tetenbaum said..As net interest margins have contracted, Tetenbaum said more banks have grown dependent upon fees from overdrafts. Those banks may face difficulty, he said, when the Federal Reserve implements new rules for overdraft charges.."Last May 2, the Federal Reserve published a proposal called Unfair and Deceptive Acts and Practices – UDAP. This will massively impact how much you make on NSF/OD. This will force you to diversify your fee income sources," he said..The Fed and consumer groups have said that "this has got to stop," Tetenbaum explained. "They perceive that many NSF/OD charges are too high, unfair.".Tetenbaum outlined some of the provisions in UDAP:.• Institutions would be prohibited from assessing any fees on a consumer's account in connection with an overdraft service unless the consumer is given notice and a reasonable opportunity to opt out of the service, and the consumer does not opt out..• Institutions would need to provide consumers with the option of opting out only from the payment of overdrafts at ATMs and for debit card transactions at the point-of-sale..• Overdraft fees would no longer apply to accounts that went into the red because there were holds placed on funds in the accounts..Tetenbaum predicted free checking will "disappear or morph into something different as the NSF fee income stream diminishes.".Todd Werner, group vice president sales and marketing for Affinion Group of Franklin, Tenn., followed up Tetenbaum's comments with information about account fee programs. He urged bankers to create account packages that include benefits such as ID theft protection, reward programs and coupons. He said these kinds of benefits can help banks substantially grow their deposits..Increasingly, banks are making their checking accounts look like credit cards, Werner said. Affinion Group research shows cash rewards are the most desired feature of a bank checking account. Customers also like award point programs and discount programs. In additional to identity theft protection, they want help resolving fraud incidents, should they come up. Werner said banks that are able to package these kinds of benefits into their saving and checking account offerings have a much greater chance of retaining customers and attracting new deposits.