Wal-Mart has made big waves with its pre-paid debit card.  With over 4,000 locations that have a huge amount of traffic, any effort by Wal-Mart to offer financial products is instantly a serious threat to banks.  The $3 monthly fee for their debit card is highly competitive at a time when checking account fees have been rapidly increasing.  As a result, Wal-Mart has been stealing clients from traditional banks.

A recent American Banker article highlights how some credit unions have started to “embrace this trend by modifying their ATMs to sell fee-free stored-value cards.”  More banks should test these types of strategies to adapt to the rapidly evolving environment and compete against new threats like Wal-Mart.

This particular strategy may not be the silver bullet to win back or retain customers.  The article points out that “people go to ATMs because they don’t want to use a card for their next purchase,” and the ATM may not therefore be the best delivery mechanism.  

Even if customers take advantage of these pre-paid cards, it will not be sustainable to continue providing this service for free.  Banks will need to continue testing to find the right price that makes the product workable for the bank and still a compelling value proposition for the customer.

Banks are clearly in need of innovation to develop winning strategies in an environment with increasing regulation, lower profitability, and pressure from low-cost competitors.  Larger banks in particular have not innovated enough and should follow the lead of the smaller banks and credit unions.  Banks cannot afford to be stagnant and cannot afford to roll out strategies that do not work.  Trying many new strategies, measuring the outcome, and rolling out the ideas that work is the only way to win in this environment.

JP Morgan Chase recently announced it will add 800 new ATMs in California and four other Western states. Many other banks have also been making investments to expand the ATM network. Investing in ATM expansion is a good idea in our current economic environment if done right and has two main potential benefits.

First, it could reduce the need for customers to transact in the branch. The branch is by far the most expensive channel of service, so this could help banks reduce costs. But to actually realize these cost savings, banks need to understand the impact to the branch on metrics like the total number of teller transactions and transactions by time of day. This could allow banks to reduce teller staffing or cut back on hours while still meeting customer needs. Without understanding the impact on the existing network, banks will simply be adding in more cost.

Second, having a more convenient network could bring in new customers or help retain existing customers. Major ATM network expansion should be accompanied by marketing campaigns to make current and potential customers aware of the bank’s investment. Ideally, banks would experiment with different marketing approaches (e.g. radio, local marketing, or social media) to find what is most effective.

Banks should also measure the impact on new account generation and retention for branches near the new ATMs and identify whether there are particular cases where the new ATMs are most effective to inform future investments. Do they have more of an impact when placed close to the branch or further away? Do demographics or competitive factors influence the effectiveness of the ATMs?

Investing in ATMs can be a smart idea as banks try to find the right service model and make the most of less expensive channels. However, just adding ATMs is not enough by itself and can simply be one more additional cost. To make ATM expansion successful, banks need to market the new ATMs, locate them in the right places, and identify opportunities for offsetting cost reductions in the branch.

As banks struggle to maintain revenue and profitability with low rates and increased regulation, mass affluent is a segment where banks can achieve success in this difficult environment. For example, Bank of America recently reported strong growth in mass affluent despite the significant challenges in retail banking right now.

In fact, A relatively small percent of customers have always driven the majority of profit for banks.  However, this is even more true today as it becomes harder to make money from customers with smaller relationships (due to shrinking debit card and overdraft fees).  All banks are competing fiercely for these mass affluent customers and the larger, more profitable relationship they bring to the bank.

How can you win the business of these valuable customers?  With the current rate environment, banks cannot easily provide the special pricing that has worked in the past, and the offer would not be that compelling to most customers anyway.  For example, providing a significantly high deposit interest rate may only mean 20 basis points. But banks can still achieve success by focusing on excellent service for these customers and rewarding and recognizing their loyalty.

1. Provide excellent service and relationship management.

Banks need to ensure that mass affluent customers are receiving excellent service across different channels.  Key service elements to be competitive include adding relationship managers to branches, routing these customers to a special part of the call center tailored to handle their needs, and providing the technology to seamlessly and easily manage their accounts.

These are all expensive investments, so banks will need to pick and choose where to spend on service to maximize the benefit to the customer and the response from the customer.  With each potential investment, banks should invest on a limited basis when possible (for example with a subset of customers, branches, or markets), measure the impact, and move forward with the investments that work best.

2.  Reward and recognize customer loyalty

It is also important to recognize these customers for giving you their business and to reward them for their loyalty.  Some banks are rolling out more traditional loyalty programs to directly reward customers based on the depth and size of their relationship.

Another approach is to provide customers with perks for their loyalty, such as waiving fees or providing automatic fraud protection.   These types of perks may go unnoticed, so you also need reach out to customers to make sure they are aware they receive these perks for their valued business.

There are many different ways to reward and recognize customers, so banks should also experiment with different options to see what is most meaningful for customers and drives them to stay with the bank or expand their relationship.

The New York Times published an article last week about Wal-Mart gaining traction for its banking services because of customer dissatisfaction with bank fees. If you missed it, it’s available here.

A banker reading the article must have thrown up her hands in disbelief. Wal-Mart, the company everyone usually loves to irrationally bash, is lauded for offering a debit card for a $3 monthly maintenance fee, while Bank of America is teetering on a Congressional inquiry for its $5 monthly fee! Moreover, customers love the $3 fee per check cashed that Wal-Mart charges. We can only imagine what would have happened if B of A announced that same fee.

How could banks see such a maelstrom for the same fees that Wal-Mart and other entities would charge? More importantly, what should banks do about it?

It seems that banks have been singularly focused over the last 10+ years on building deep, multi-product customer relationships (and have spent tens of millions in consulting fees to help get there). Free checking was usually the foundation of these relationships. Clearly, this approach works for a large segment of the customer base. But there is also clearly a segment of the population for whom a deep banking relationship is not realistic. Everyone agrees there needs to be some way to charge these customers.

For some banks, the answer may be to follow Wal-Mart’s lead and shift away from a customer relationship mindset and try a more a la carte approach. Dollar stores have captured large amounts of retail sales share from Wal-Mart in the last several years by offering similar prices but in a more convenient format (both closer to the customer and easier to get in and out of). Banks could share the same inherent advantages. Perhaps the path forward for some banks may be to move from a mindset of “how do I make my unprofitable customers profitable?” to “can we provide a range of banking services for customers and non customers alike that is more compelling than the value proposition of Wal-Mart?”

This is probably not the solution for all, but for some bank it seems worth piloting. After all, it can’t be much worse than $5 monthly debit fees…

This past week, after significant backlash and immediate customer response, Bank of America announced that it will cancel its plans to charge monthly debit card fees. Several other banks with similar plans quickly followed suit.

There was no way to predict the magnitude of this outcome.  Banks have been increasing checking account fees, and while there has been some negative reaction, the response was not even close to what was seen with debit card fees.  The new fees also seem logical and defensible.  Banks have always provided this service for free but can no longer do so now that debit card transactions are unprofitable with lower interchange fees.

But the response was larger than most expected, and it will be very difficult to win back customers after they have left.  To see an extreme example of the cost of making just one bad decision, take a look at Netflix.  In a short amount of time, the decision to split the DVD and streaming business resulted in three million customers (over 10% of subscribers) leaving.

It is essential to de-risk the decision making process by trying new ideas in a very limited subset of the network.  JP Morgan Chase and Wells Fargo both tested new debit card fees in just a few markets before making any sweeping changes.  They decided not to roll out the new fees and have emerged largely unscathed.

Banks will continue looking for ways to plug revenue holes.  Some new tactics will work, while others will have drastic consequences.  These decisions are too important to be unsure of their precise impact before putting the business at risk.

This past month, American Banker noted that many banks have found their online and mobile banking services are not providing a great user experience. The banks discussed have begun experimenting with different features and different pricing options for those features. As the article outlines, 8 of the top banks in the US are each spending approximately $100 million on these new web and mobile offerings.

New web and mobile services are great opportunities to improve customer satisfaction and retention and could even provide opportunities to increase fee revenue. Most web offerings currently allow for little more than routine tasks, but many banks are realizing that customers are looking for new types of tools and additional flexibility in how they manage their accounts. In light of this, banks are considering innovative features, such as:

Improving the ability to manage common tasks via mobile devices and the web, such as bill payment, mobile check cashing, fund transfers, etc.

• Providing financial planning tools that track spending, manage finances, and recommend additional products / services
• Offering small and simple “mobile loans,” with instant applications through the mobile device

These types of web and mobile revamps require large investments, and it is important to make the most of these investments.  Banks need to understand which customers to target with each feature, as well as the optimal fee structure for each feature.

For example, younger customers may respond best to account management tools for mobile devices, while customers with a greater number of products may respond best to financial planning tools.  New features can be made available to all customers, but it is important to focus marketing and advertising on the features that are most interesting to that customer.

Banks may also consider charging fees for some new features.  This is a great approach to increasing fee revenue.  Rather than charging for services customers are used to receiving for free, these fees create a better value proposition where customers pay fees for features and services they actually value.

The key is to identify the optimal fee for each feature to optimize profitability of the fee but also to make sure the fee is not too high (and therefore likely to turn off the customer and increase the risk of attrition). It’s also important to identify the types of customers for whom the fee should be waived.  For example, does waiving the fee for customers with balances over a certain amount make them likely to sign up for the feature?   More importantly, does waiving the fee also make them more likely to bring in additional money or less likely to leave the bank?

In order to maximize ROI for these digital initiatives, it’s important to understand how customer segments will respond to these offerings. Launching these features with a subset of customers and trying different marketing and pricing approaches is an easy and effective way to make the most of these major investments.

Last Thursday, Bank of America announced it will begin charging a $5 monthly fee for debit card users with a basic checking account.  Many banks are still looking for ways to make up lost revenue due to the Durbin Amendment, which slashed debit card interchange fees.

This announcement was immediately followed by significant backlash. The Washington Post reported that “Bank of America got pummeled by investors and its customers Friday” and “saw its stock fall more than 2 percent in late-morning trading.”

We wrote about this topic two months ago, expressing that banks should follow the lead of Wells Fargo and Chase – testing new debit card strategies before implementing them.  While the initial press and stock price reaction may not have long term consequences, there is a real risk that these fees will drive customers away and ultimately hurt profitability.  This is why we argued that banks should try these new approaches first in a limited risk way to make sure it will work before rolling it out across the network.

Fee hikes are always difficult decisions to make.  Spread revenue is very low right now, and regulation is squeezing fee income.  But it is hard to anticipate the reaction to a new strategy and understand all of its potential consequences.  Despite the difficult environment, banks should be patient and test new ideas first to make the best decisions possible.

Market research firms comScore and Nielsen report that, in 2011, the number of customers using mobile banking rose 54% over last year to 30 million. comScore also explains that in a recent study of ~1,000 customers, only 10% report accessing their financial accounts by visiting a brick and mortar branch.

As part of this shift, exclusively online banks, for instance ING Direct and Ally Bank , have seen growth over the past year, a result due in part to increased use of smartphones, streamlined data plans, and a backlash against higher fees at traditional banks. Because of their lower overhead costs, these online banks are able to offer expanded services, like a surcharge free ATM network, accounts with higher checking and savings yields, and lower fees.

Traditional banks need to be proactive in order to be competitive with exclusively online banks, rather than scrambling to react to it after it’s already in place. A few critical factors banks need to test before developing an online/mobile strategy include:

• Fee Structures – Because online and mobile customers have little physical interaction with the branch or with branch staff, they may perceive themselves as receiving little service from the bank. How then should fees be structured in way that both drives profits and also maintains online/mobile customer satisfaction?  Alternatively, how can traditional banks make the value proposition clear to online and mobile customers?  Which features and services will these customers be willing to pay for?

• Call Center Staffing – How can banks use call center training to reduce wait times for online/mobile customers? How can banks more effectively use call center staff to make up for cross sell opportunities lost due to non-interaction with branch staff?

• Branch Network – Banks need to understand the impact of increased online/mobile banking on the branch network. There may be opportunities to reduce costs as customers interact less in the branch.  Banks also need to make the most of every interaction when customers do come to the branch.  Specific ways to do this include targeted cross-sell offers at the ATM, deploying relationship bankers to interact with high value customers, and adding signage / digital merchandising to feature new product offers.

The writing is on the wall. The trend toward online/mobile banking isn’t really a trend; it’s a sea change in how customers interact with their banks. The complexity and multiplicity of the factors involved with implementing a long-term online/mobile strategy make it imperative that banks understand which programs, fees, promotions, etc. will work and which won’t before they make significant investment. Leading banks are employing a scientific testing approach to understand the impact of any new idea and make the most profitable decision going forward. Click here to learn more.

The Wall Street Journal recently published an article discussing Bank of America’s announcement that it plans to cut $5 billion in expenses throughout 2012.  In addition to cutting a significant number of jobs, Bank of America will also sell over 700 branches and their attached assets.

Many large banks are beginning to look for ways to streamline their operations in an effort to deal with uncertain market conditions, increased regulation, and decreased or flat revenues. These banks may cut costs by reducing the number of branches, particularly as more customers are turning to online and mobile banking.  On the other hand, some banks may view this as an opportunity to grow their footprint and pick up valuable assets at reduced cost.

Banks looking to reduce branch count need to identify which specific branches to close or sell to minimize financial impact to the network. In our experience, banks too often look at the P&L of a branch in isolation without considering how the impact on nearby branches affects the economics of the decision. For example, when closing a branch, it is therefore particularly important to look at branch accretion and to then target branches whose customer base is more likely to be retained at nearby branches. Understanding which factors are most important (e.g. distance to nearby branches, market share, depth of relationship with the customer base) will help banks select branches that can be divested with minimal impact to the network.

Banks that are in a position to purchase divested branches need to be smart about judging whether the acquired branches will ultimately justify investment. Many of these locations sit on prime real estate and present an attractive opportunity to expand a network.  However, it is important to consider the possibility that  customers currently banking with the competitor at that location may leave the branch when it is bought.  Similarly, many of the customers who eventually end up banking at that location will likely be drawn from existing nearby locations and will not be incremental customers.  Using robust analysis of past branch acquisitions will help banks determine how best to draw incremental customers.

Banking Strategies recently published an article on the need for financial institutions to innovate, as we discussed in an earlier article. One area of focus mentioned in the Banking Strategies piece is channel integration and the development of growing channels, for instance online and mobile.   In this particular area, banks are making significant investments, but opportunities to better target channel investments going forward also exist.

The Banking Strategies article highlights the idea that increasing customer engagement across channels, particularly digital channels, “can contribute significantly to enhance the customer experience.”  This is a commonly heard theme, but few banks actually know how increased engagement affects key metrics like retention and number of accounts per customer.  Do customers actually become more likely to stay with the bank or open additional accounts?

Furthermore, there are many possible areas for investment right now –account management apps, better online bill pay, mobile check depositing, social media, targeted offers delivered by ATMs, etc.  Which channels / features / services are actually driving an improvement in key performance metrics?

These are challenging questions to answer.  One approach to answering them would be to take customers who increase engagement in some way and compare performance to customers who did not.  However, this approach is problematic as the result is often biased by the fact that customers who increase engagement are inherently more likely to be better customers.

When rolling out a new service or an improvement to a channel then, start by offering it only to a subset of customers or markets to get around this challenge.  Measure the impact on performance metrics relative to “control” customers or markets that are similar in all key ways except they did not receive the new offering.

In most cases, once you have invested in a new technology, it will make sense to roll it out network-wide given the high up-front cost. Our recommended approach of testing a new offering will likely not affect the go / no-go decision.

However, there are many other important questions it can inform:

• How much should be spent on marketing this new service / feature?
• Which types of customers tend to respond best?
• What channels and types of services drive the best customer response and should be candidates for additional investment in the future?

Innovation is highly important, but it is also not cheap.  When rolling out new ideas to improve channel integration or add new features / services, test the new ideas first and measure the impact.  This approach is the only way to know how to best bring a new idea to market and how to maximize ROI of future investments.