Encouraging new-channel use: when inducing customers to employ a new channel, such as mobile banking, or a new product, such as bill pay, which approach by the bank is more effective: the carrot or the stick?

• Author: Griesel, Achim

FOR MANY YEARS, WE HAVE TRIED MIGRATING CUSTOMERS from the branch to other channels, either to enhance customer service and loyalty or to save money. Where transactions were once handled in-branch or by check, our industry now has debit cards, online banking, online bill pay, e-statements and mobile banking.

Whenever we add new channels, we want customers to adopt at a high level, but how do we increase penetration? There are two diametrically opposed approaches: the carrot or the stick.

Most large financial institutions use the stick approach if you visit Bank of America, you'll be offered two different checking options. These accounts require a monthly fee of $8.95 or $12.95--unless you're willing to "pay?" in one of the following ways:

* Set up a monthly direct deposit of $250 or more.

* Keep an average daily balance of $1,500.

* Agree to receive paperless statements and make all deposits online or at an ATM.

For the large banks, the stick approach may work. With their brand awareness and huge networks, big banks have the customer portfolios and convenience that community financial institutions simply cannot replicate. That means large banks can afford to run off existing customers and ignore some prospects.

At the community financial institution, this approach may not work as well. In 2010, one of our clients, a community bank with 25 branches, implemented the stick approach in its new checking product design. Customers had to pay a monthly fee unless they took e-statements. Below is the impact this change had on customers and profitability over the next eight months:

* Openings were down 3 percent.

* Closings were up 51 percent.

* Fee income was down 3.6 percent in year one In the long run, it will likely continue to decline with a shrinking customer portfolio.

In an even more extreme attempt to increase profitability, another client rolled out a minimum balance requirement on all existing and new-customer checking accounts. The results were even more negative. In just six months, the financial institution experienced:

* 70 percent fewer account openings.

* 25 percent decline in its checking portfolio.

* 40 percent lower overdraft income.

* The decline in consumer accounts led to 40 percent fewer account openings for small-business accounts.

Our last example of the stick approach is a Midwestern bank with $19 billion in assets (the data outlined below came either from the FDIC website, or from the bank's press releases). In March 2010, the bank rolled out product changes based on the stick approach. At the time, the bank had approximately 1.7 million...