Consultant tells banks: "Fire" unprofitable clients who don't pay fees

Jun 2, 2010 7:00 AM

You may be saying goodbye to free checking (if you haven’t already) and hello to new fees and other checking-account changes as banks scramble to find ways to make up for income they’ll soon be losing as new federal rules curb their ability to rake in profitable debit card overdraft fees.

Banks no longer will be allowed to automatically enroll customers in overdraft protection, charging them hefty fees for this feature that they may not have wanted in the first place. Under the new Federal Reserve rules that become effective July 1 for new customers and Aug. 15 for existing ones, debit card purchases or ATM transactions that would exceed a customer’s balance and trigger overdraft fees will not be processed unless the customer has agreed in advance by opting in for overdraft protection.

Many banks rely on overdraft fees to generate up to half of all the revenue they get from retail checking accounts, according to a recent report issued by Celent, a Boston-based banking industry research and consulting firm. The report, titled, "Reg, Reg, Go Away: Sorry Banks, They're Here to Stay," the report notes: “Overdraft fees are big money to most retail banking operations. It is the engine that pulls along free checking.”

While the new rules don’t prevent banks from imposing overdraft fees for covering checks or recurring debits for bill payments, debit card purchases still account for 41 percent of overdraft fee revenue for banks, so the new consumer-friendly opt-in rules are expected to take a big chunk out of the bottom line at most banks.

The solution? “Fire customers: understand customer profitability and get rid of customers who aren’t profitable,” the report advises. Celent notes that only about half of all checking accounts are profitable to banks, so banks have to sort out which customers to keep and which to “fire."—Andrea Rock

Tomorrow: Find out whether you're among those customers Celent recommends firing, and what account changes you might expect.

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