Paradigm shift needed to replace lost fee income.

• Author: Triplett, Ted
• Position: 2010 ABA Bank Marketing Survey

THE BANKING INDUSTRY CONTINUES TO CHANGE at an unprecedented pace and is being confronted constantly with new challenges. According to the 2010 ABA Bank Marketing Survey Report banks listed regulatory changes (39.9 percent) and growth and retention (22.9 percent) as the biggest marketing challenges they will face in the next 12 months.

The latest regulatory changes threaten to reduce debit card interchange income--challenging banks to re-examine their business model and their products and services. Banks have no choice but to create more effective strategies to make up for lost fee revenue without relying so heavily on low-cost checking accounts or rewards programs linked to debit cards.

These types of products attract deposits by offering no fees or paying a high interest rate and rely on overdraft and debit card revenue to make the relationship profitable. But accounts like rewards-based checking are likely to be less profitable as result of these regulatory changes--forcing banks to accept new realities.

New debit card legislation (which some say may reduce interchange revenue for some banks by two-thirds) and the recent "opt-in" regulations essentially will derail the revenue components of these accounts. That may leave banks scrambling to find the next "big" thing to help them make up for lost fee revenue and keep the customers they already do have.

But, banks should consider not chasing after the next "can't-miss" product--and instead, focus on developing strategies around relationships and client interaction. Programs like debit-card rewards are extrinsic to the service offering and do little to reinforce the value derived from dealing with the bank. Instead, they simply encourage customers to modify their behavior and use their debit card more frequently.

Granted, these programs can be effective to help underpin the deposit growth strategies of a bank, but they do very little to help retain customers. And they're successful only as long as they're better than the competition. Should another bank introduce a better rewards product, customers will be naturally inclined to switch banks...