Checking free-for-all: have banks gone crazy? First, there was free retail checking, and now all over the country, banks are marketing free checking for small-business customers. Not every institution is convinced that it's a good idea, but many that have tried it claim that it has given them a competitive edge.

• Author: Bernstal, Janet Bigham
• Position: Commercial customers - Cover Story

If you're still on the fence about whether to offer free small-business checking, read this: Experts say it's no longer a matter of "if" but "when" you should offer this product. The case in favor of free small-business checking is compelling, and it keeps getting stronger. In one recent example, free checking tops the list of what's considered "very important" to people looking for a new bank, according to a survey released in January 2005 by Keynote Systems.

In the Keynote Customer Experience Rankings for the Online Banking Industry, consumers said they consider free checking (68 percent) and fee and service charges (67 percent) more important than online banking functionality (56 percent) or even the physical location of bank branches (45 percent).

Yet bankers historically have resisted the idea that free products can be good, notes David Furnace, managing director of Sheshunoff Management Service's Revenue Enhancement Division, headquartered in Austin, Texas. Take a look at the growth of free retail checking. While some very progressive banks started offering free retail checking as long as 25 years ago, only in the last five to seven years have others caught on to the benefits.

The general feeling was that free checking might bring in the wrong sort of client, that is, the low-balance, unprofitable type. The reality was quite different. Furnace explains that recent data shows an average free retail client generates over $200 in fee income per account per year. In addition, they generate approximately $50 to $80 worth of spread income. The incremental front and back office costs on a checking account range between $50 and $60, and the cost of acquisition is somewhere between $30 and $80.

"The typical free retail account generates more fee income than the average non-free account and the average balance across the client base was $1,200," claims Furnace. "It turns out that what everyone was fearful of, actually provided a little more revenue with a decent balance."

Not surprisingly, free retail accounts gained in popularity and can now be found in most markets. Within the past two or three years, bankers began to express the same skepticism about the idea of free small-business checking initiatives that they once expressed about free retail checking. Once again, the numbers made sense. While activity in small-business accounts closely mirrored retail accounts, the net marginal contribution in the average small-business account is close to $500, versus $200 dollars for free retail.

"The economics on small business are actually better [than retail] because there's a lot more margin, and the fee income they throw off is greater," explains Furnace. "So when banks ask: 'Does it make sense to offer free small-business products?'--our firm says, yes, in a heartbeat."

Those that do a good job of executing a free small-business checking initiative can double or triple the number of accounts they open, says Furnace." We're not talking about 10 percent, but dramatic improvements."

Early adopters

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