While Bank of America's (NYSE:BAC) decision to forego billions of dollars in potential revenue in the form of debit card overdrafts and "add-on" products isn't exactly new, there are now some concrete numbers.
It turns out that Bank of America gave up around $6 billion in annual revenue by getting rid of these things. However, the bank is confident that the impact on profits should be very small over the long run, and may even end up helping the company's core business.
What they gave up
Basically, the $6 billion in lost income is split between two things: Bank of America eliminated debit card overdraft fees in 2010, and stopped selling certain add-on products like identity theft protection a couple of years later. Each of these previously brought in around $3 billion per year.
Before 2010, Bank of America would regularly approve overdrafts on debit card transactions, and customers would be subjected to a hefty $35 fee. Now, unless the customer is signed up for a cheaper form of overdraft protection, such as linking their other accounts, which only costs $10 per incident, the transaction is automatically rejected.
And on the "add-on" products side of things, the bank stopped marketing identity theft protection products in late 2011 and stopped selling credit card debt cancellation products in August 2012. Both of these turned out to be rather unpopular among account holders, and the bank actually agreed to pay nearly $800 million to settle allegations that deceptive marketing practices were used.
Less money, but more stability
In the short term, these moves have provided some much needed stability and predictability to the company's revenue.
Both overdraft protection and add-on products were rather inconsistent revenue streams. They could lead to loan losses and legal expenses, both of which are very tough to predict. However, the bank primarily chose to get rid of the two revenue drivers because of the potential long-term impact.
How it could help in the long run
Roughly half of U.S. households have at least one banking product with Bank of America, so the company's growth potential is somewhat limited in terms of being able to attract new customers.
However, Bank of America is beginning to embrace something that has worked tremendously for rival Wells Fargo: the art of cross-selling. The average Wells Fargo customer's household has an average of more than six products with the bank, and the company aims to grow this number even more. The average U.S. household has a total of about 16 banking products, so there is definitely room to grow.
And why the big focus on cross-selling? Well, aside from the fact that the big banks have limited potential to target new customers, selling a product to an existing customer is much cheaper.
Just as one example, signing up a new credit card customer through mail offers and other marketing methods costs Bank of America about $250. On the other hand, signing up an existing customer through a Bank of America branch costs just $35. So, there is tremendous cost-saving opportunity by targeting the existing customer base for new products.
And this is the main reason the bank was willing to lose out on that fee and up-selling income. When trying to court prospective customers, it's extremely important to keep them as happy as possible.
Investors should be optimistic about the new strategy
From an investors' perspective, it's good to see Bank of America listening to its customers. One survey from the overdraft fee days found that 80% of debit card holders would rather have transactions declined than face an overdraft fee. So while the bank could have been greedy and tried to squeeze some extra cash out of its customers, it decided against it in favor of the big-picture strategy.
After all, if you're unhappy about the way your checking account is handled, how likely are you to sign up for a brokerage account, credit card, or insurance product through that same bank? It's refreshing to see that Bank of America gets it, and makes my future outlook for the bank much more positive.
Matthew Frankel owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.