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The Reg E Opportunity: Replacing overdraft income E-mail

Not the reg itself—but its forcing of much-needed rethinking of strategy


Christopher K. NicholsBy Chris Nichols, CEO, Bank Investment Group

What’s the best way to handle the new Regulation E overdraft debit provisions when they take effect on July 1?

For many banks, the most productive approach is to accept Reg E as a long overdue opportunity to improve bank profitability.

At first glance, that sentence will sound counterintuitive.

Yes, the new provisions strike at the heart of fee income for many community banks. For years, fees from courtesy pay, overdraft transfers, and other revenue from customer overdrafts benefited the bottom line. Financial reform legislation will further hurt bank profitability at a time when institutions need every dollar of net income. Reg E changes, in particular, will lop off 10% to 20% from most banks’ fee income stream.

So, you ask, where is the opportunity?

Reg E will hurt–unless changes occur
A community bank survey from Banc Investment Group, the capital markets group of Pacific Coast Bankers’ Bancshares, confirms that Reg E will translate into less fee revenue. Twenty-three percent of the banks surveyed said they are likely to reduce overdraft fees on ATM and point-of-sale debit card transactions by 10% or more. Sixty-two percent said they will cut fees up to 10%.

Clearly, revenue reduction of this magnitude–at a time when a record number of banks have failed or are struggling–will likely have a big impact.

So what should be done?

First, banks needed to restructure their fees and disclosures to quickly come into compliance. By now, most banks have done so or are about to do so. Next, bank managers must turn back to the core question of profitability. In fact, there are four key initiatives banks can execute to address the loss of fee revenue from Reg E. They include:

• Tracking profitability–Benchmarking customer, product, officer, and organizational profitability down to the branch level is the first step in growing the bottom line. Without the ability to quantify, track, and reward value, banks will not be able to determine what is working and what is not.

Surprisingly, many banks operate without that level of detailed analysis.

• Bundling–For too long, banks have been transactional in nature. A review of almost any bank website shows that they market stand-alone products, instead of integrated financial solutions. Re-orienting management, marketing, and sales to think in terms of packages of products is essential. Checking, savings, debit, credit cards, lines of credit, loans, and cash management can all be brought together to triple account-level profitability.

The elite, high-balance, business bundle is the most profitable package in banking, yet few community banks offer the solution to their customers.

• Add-on services–Banks aren’t in the business of banking any more. The modern bank is a financial solutions provider and is viewed as a trusted source of financial information. Banks that grasp that concept can provide a whole host of services to retail and commercial clients and thus increase fee income substantially. Budgeting applications, electronic storage, contingency planning services, person-to-person payment, remote cash capture, and a host of other services can be added onto the solutions bundle to generate more income for the bank and provide better service for clients.

(For the first in an ABABJ.com series on “The Community Bank of the Future, click here.)

• Customized pricing
–Banks tend to think in terms of pricing along product lines. The problem: There are more than 25 different types of distinct customers in banking, each with different needs and interest rate sensitivities. If a bank offered a different product to each one, it would have a very confusing product line, and sales would suffer.

It makes sense to offer a set of products to meet service needs and then vary the price according to usage, balances, and market. By moving to segmented or customized pricing, banks can dramatically increase profitability.

Reg E will clearly have a revenue impact, but it can be turned into an opportunity–if bankers are committed to finding new ways to grow profitability.

The good news is that real opportunities exist to not only generate revenue, but also deepen relationships with clients by providing value-added solutions.

Chris Nichols, President & CEO  of Banc Investment Group, which provides capital markets solutions to community banks across the country.

[This article was posted on June 25, 2010, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2010 by the American Bankers Association.]
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