Banks Tell Customers: Pay Up or Get Out!

With the broader market barely budging, shares of PNC Financial Services (NYSE: PNC  )  closed roughly 2.5% higher on news that the bank will no longer offer full-service checking accounts for free.

The decision should come as no surprise, and the bank acknowledges that the changes will likely only impact roughly 10% of its customers. Last month, PNC's CFO Rick Johnson had this to say about how the bank is viewing the new environment:

"The current retail banking model is built on giving away services -- free checking, free online banking and free deposits. All banks are in the process of rethinking the fair value exchange we have with our customers. And PNC is no exception."

While truly "free" accounts will no longer exist, most customers will avoid the fee by simply maintaining a certain balance or by linking a direct deposit to one's account.

As my colleague Matt Koppenheffer and I recently discussed, banks were able to justify the free checking account services because of the revenue they generated from interchange fees and overdraft fees. However, with new regulation limiting these fees, banks have had to adjust retail cost structures.

Bad for customers, great for investors
There's no two ways about it -- as consumer, being charged a fee is never fun, but from an investor's perspective, charging fees on certain customers to increase profitability is the right decision.

In order to avoid an extremely adverse consumer reaction like what Bank of America (NYSE: BAC  ) experienced when it proposed implementing a $5 monthly fee for debit card use for certain customers, communication will be essential, and PNC appears to be managing the changes in a prudent way -- most of the changes will not be effective until December or June 2014.


If done correctly, establishing or increasing a fee can avoid public outrage and be a great thing for shareholders. In late 2011, the beloved retailer Costco (NASDAQ: COST  ) clearly communicated to its member its intention to increase its annual membership fee by 10%, and in 2012, the company saw its highest annual membership renewal rate -- nearly 90% in the United States.

Will this fee become a huge money-maker for PNC? No, but it will allow the bank to focus on profitable customers and how it can best serve those customer that drive the most value for cross-sales opportunities.

A sweeping change
PNC is not the only bank with this strategy. Though without the same dramatics as its proposed debit card fee, Bank of America is aiming to migrate less-profitable customers into its eBanking Checking Account, a product that incurs no fee as long as the customer only transacts with the bank's electronic platforms such as ATMs and online bill pay.

In addition to squeezing more out of less-profitable customers, B of A is putting increasingly more resources around nurturing its most profitable customers through its Platinum Privileges program -- the bucket consisting only of customers with assets with the bank of greater than $50,000.

The retail banking model is no longer a one-size-fits-all business. Banks will become increasingly specialized and will continue to do what is most profitable for their shareholders.

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