How Capital One’s new policy will affect your bottom line
In a stunning move, Capital One announced Wednesday plans to scrap overdraft and NSF fees for consumers beginning in Q1 2022. In an email to employees, Capital One CEO, Richard Fairbank, said the move was “our effort to bring ingenuity, simplicity and humanity” back to banking, according to USA Today reports.
The apparent change of heart comes six months after JPMorgan Chase CEO, Jamie Dimon —who joined four other megabank CEOs in an appearance at a May 26 Senate Finance Committee hearing—refused to commit to refunding $1.4B in overdraft fees that his financial institution collected from pandemic-stricken customers during 2020.
(Want to see Dixon’s testy exchange with Massachusetts senator Elizabeth Warren? The sparring begins at 20:32 of StrategyCorps' most recent webinar, Getting Over Overdrafts.)
The move will cost Capital One an estimated $150M in 2022, writes Forbes’ Anna Kaplan. Previously, Capital One customers who overdrafted their accounts would be charged $35 per occurrence, with a maximum of four charges per day.
According to the Consumer Financial Protection Bureau, banks with more than $1B in assets collected nearly $15.5B in revenue from fees for overdrafts and non-sufficient funds, with JPMorgan Chase, Wells Fargo, and Bank of America accounting for 44% of the total reported. More staggering, OD and NSF fees made up 67% of reported fee revenue. StrategyCorps’ internal data for banks under $1B in assets shows a similar dependency on such fees.
Capital One isn’t the first financial institution to ditch overdraft fees — in June, Ally Bank announced it would scrap the practice, and two months later, Alliant did the same.
For most large banks like Ally and Capital One, the move—while significant in revenue impact in absolute dollars—doesn’t affect as large a relative percentage of total fee revenue of community-sized institutions making the same shift in practice, said StrategyCorps partner, Mike Branton.
“The message to community FIs is that these large banks are going to use this as a competitive advantage and a differentiator in their consumer marketing and acquisition efforts,” Branton said. “This puts even more pressure on community FIs to modify their overdraft plans, which will increase the urgency to find replacement fee income.”
In a recent survey of bankers from across the country, we found that almost 79% agreed (or strongly agreed) that overdraft-related fees will continue to decline due to market, regulatory, and/or political pressures.
But how would these bankers actually respond? Several potential revenue magnets proved to be attractive options, none more so than the idea of creating overdraft-proof accounts—protection provided in exchange for a nominal, non-waivable monthly fee (i.e., $5-$8).
A change in overdraft philosophy will only go so far.
“For the banking industry to replace lost overdraft revenue will require much more than just a fee-based account that is overdraft proof,” Branton said. “FIs will also have to offer new and different services in their checking products that consumers consider worthy enough to pay a subscription-like monthly fee for.”
The wildly popular subscription pricing model has proven to be the answer to a number of consumer questions based on convenient ways to pay for services that add value to their everyday lives—as well as the most simple question, “What’s in it for me?”
Providing services that add value to consumers’ everyday lives and answering this simple question is where StrategyCorps has found its niche in the financial market for more than two decades. We show FIs how to provide this in a retail checking product to gain product differentiation and deliver much-needed consumer-friendly, recurring revenue.
Here’s how Renasant Bank chief marketing officer, John Oxford, explains this strategy:
“The idea is to add a subscription-based style account with added-value features versus just free checking that may save a buck for the customer in a fee but doesn’t give any true value other than just not paying,” he said. “StrategyCorps’ BaZing solution gives a lot of real value—and you can simply use it.”
Research by Cornerstone Advisors shows consumers have a strong interest in purchasing those value-added services — cell phone damage protection, identity theft protection, travel insurance, etc. — from banks and credit unions. Three in 10 Young Millennials and four in 10 Old Millennials said they would purchase these services from an FI, a more significant percentage than said they’d buy them from the big tech titans like PayPal, Google and Facebook.
During this revenue recession, FIs must deliver checking products with benefits that consumers are demanding—many of which they are already buying from third-party companies — to offset declines in overdraft revenue.
This is where StrategyCorps can help. We generate an average of $500,000 of new, recurring revenue per $1B of assets for financial institutions of all sizes. If you’re interested in learning more about how StrategyCorps can help your financial institution generate recurring revenue, let us know.
Dave Pond is a content strategist at StrategyCorps.