As more banks prepare to charge for basic products, a carrot-and-stick strategy with customers may work better than a more punitive approach.
Bank of America Corp. is adopting the former in testing new checking accounts that in most cases allow a customer to sidestep a monthly maintenance charge only by doing more business with the bank.
It remains to be seen whether such "relationship pricing" can help banks soften the sting many consumers may feel as a result of having to pay for a product they have come to expect for free.
But experts said the strategy has a better chance of acceptance by consumers than would simply slapping on fees with no way to get around them, a tack that other banks are considering.
"It's the implicit recognition that the mind-set that has prevailed until now is finally gone, which is … that a checking account is kind of like the entry-level gateway to a broader financial services relationship," said Ron Shevlin, a senior analyst at the Aite Group LLC research firm in Boston. "That has failed miserably."
The debate over checking account and other fees has grown as new regulations, including overdraft limitations and pending caps on debit card fees, have taken effect. Banks are looking for ways to make up for lost revenue and testing the waters with everything from annual fees on credit cards to charging for paper statements.
Bank of America on Thursday announced four checking account products it will begin testing in Arizona, Georgia and Massachusetts at the end of the month and eventually roll out nationwide. Each type charges a monthly fee, ranging from $6 to $25, though three of the four give customers ways to avoid the fee by depositing a certain amount, maintaining a set balance, using a credit card or satisfying another criterion.
"What we're wanting to do is establish relationships with our customers based on their needs," Susan Faulkner, the deposit and card products executive at the Charlotte, N.C., banking company, said in a conference call with reporters on Thursday. "What we're trying to do with these solutions is give you different benefits … based on your full relationship that you bring to the bank."
For example, a customer using Bank of America's new "Enhanced" checking account can get a $15 monthly fee waived for depositing $2,000 or more into any linked account, maintaining a combined minimum daily balance of $5,000 in linked accounts or using a linked Bank of America credit card for at least one transaction per month.
Though overhauling an entire account lineup is rare, the idea of rewarding customers for using more services is not new.
Several banking companies, such as JPMorgan Chase & Co. and Citigroup Inc., give credit-card holders the ability to earn more rewards points for using more products. Some also offer better rates on lending products for using more services.
"There will be a tiered fee structure in most of these fees," said Robert Hammer, the chief executive of the credit card consulting firm R.K. Hammer in Thousand Oaks, Calif. "If you have more balances, you may pay less. That's been banking since … 1950."
But many banks have resisted adopting a pricing menu based on the use of multiple products because of internal fights over sharing revenues and expenses, Shevlin said.
"For years banks have talked about this notion of relationship-based pricing," Shevlin said. "That has really been tough to do for most banks because of the of the organizational structure. Most products have their own P&L."
"Bank of America has pretty much sucked that up and said, 'We have to rationalize this,' " he added.
Even if customers are angered by the fees, some may not switch banks if they are using multiple products, Shevlin said. "It is really painful to move all of that," he said. Younger consumers who may be "less ensconced" with their banking relationship may be more likely to switch.
Regulatory pressures are a strong motivator of pricing changes.
Last month the Federal Reserve Board proposed capping the fees that debit-card-issuing banks collect from merchants at a maximum of 12 cents per transaction, compared with the current average of 44 cents.
This rule, if adopted, could reduce debit interchange revenue by $13 billion annually, according to CardHub.com, a lead generation site for cards.
"It's a fact that there's a new economic reality and there are new regulations and legislation," Faulkner said. "Of course that new economic reality is sitting in front of us," she said.
JPMorgan Chase cited the debit interchange regulation as its primary reason for adding checking account fees this year.
Starting Feb. 8, customers using its Chase Checking account, which will no longer be offered to new customers, must do a minimum direct deposit of $500 or make at least five debit card transactions in a single month to avoid a $6 fee. Previously, customers could do a direct deposit of any amount or make five debit card transactions to avoid the fee.
JPMorgan Chase is also offering an account called Chase Total Checking that carries a monthly service fee of $10 to $12 depending on the state. Customers can avoid the fee by either making at least one direct deposit of $500 or more, maintaining a $1,500 minimum daily balance in the account, maintaining a $5,000 average daily balance in all deposit and investment accounts or paying at least $25 in fees for other checking-related services.
"We don't want to raise fees on our customers," a spokesman for JPMorgan Chase said Wednesday, “but unfortunately regulation is forcing us to do it, and as a result some customers may end up unbanked.” He declined to discuss how many customers would be subject to a monthly fee as a result of the changes.
Despite apparent momentum behind adding checking fees and possibly even fees for debit card use, it is not a given that all banks will do so, and this could give some players a competitive advantage, said Dave Martin, an executive vice president and chief training consultant at NCBS, the consulting arm of SunTrust Banks Inc. Community banks and credit unions could steal customers from banks like JPMorgan Chase and Bank of America by marketing no-fee accounts.
TCF Financial Corp., which is suing the Fed to stop it from adopting the debit interchange rules, had previously imposed more checking fees but announced changes Wednesday that it said would be friendlier to customers.
TCF customers in the past could get a $9.95 monthly fee waived if they made a direct deposit of at least $100 every month. The bank raised that limit to $500 but opened it up to multiple types of deposits. It also added an option for a waiver: doing 10 or more account transactions per month.
It also dropped a $500 minimum balance option that checking account customers could meet to avoid the fee. Customers can still get the fee waived by maintaining a $2,500 minimum balance in all their accounts.
The change was made to attract checking customers, said Jason Korstange, a spokesman for the Wayzata, Minn., banking company.
"We're kind of a meat-and-potato type of bank," Korstange said. "We take in deposits, and we lend out money and hope to collect our loans. That's what we have here. We don't have a lot of other ways to make fees. … We need more checking accounts to get whatever fees we can."
Martin called Bank of America's approach sensible, noting that it could simplify things for customers and employees by offering a small handful of account options instead of a smorgasbord of account types.
In a move similar to Bank of America's, Citi in September announced it would offer three types of checking accounts in its retail branches, with the ability to avoid fees based on balances and transactions.
"Part of the problem that I think some banks will face if they don't do this right is analysis paralysis," Martin said. "If you give too many options, you end up like the person staring at a Starbucks menu and they can't make up their mind. It needs to be plain and simple enough for customers and, frankly, for employees to understand."
Bank of America will begin offering its new accounts first to new customers in the test states and to existing customers by midyear. It is planning to begin rolling out the accounts nationwide in the latter half of the year and expects the project to be completed by the end of 2012, Faulkner said. She noted that the bank does business with 57 million households. It may tweak fees and other account requirements based on feedback during the test.
"Obviously, with that size, it doesn't happen overnight," Faulkner said.