Bottom-line impact of new regulations demands checks get a second look
The economics surrounding revenue sources for financial institutions are in flux. Changing regulatory requirements within the Durbin Amendment, the CARD Act of 2009 and updates to Regulation E are affecting traditional profit-generating avenues that financial institutions have come to rely on. Revenues from products like debit cards and credit cards are contracting as a result of legislative pressures. That contraction will continue with a financial impact to the industry expected to top more than $12 billion annually, according to a recent white paper by Javelin Strategy & Research, Facing Durbin: Enhancing DDA Value With Check-based Solutions.
In today’s changing economic landscape, the one thing that hasn’t changed is the critical role checks play in the payment value chain. Although debit cards are now more commonly used than checks as a non-cash payment instrument in the United States, checks are still an integral payment option and a key component in a primary account relationship — making them worthy of renewed attention. As financial institutions seek to identify new profit centers in response to changing regulatory requirements, it’s time to revisit, and rethink, how checks can enhance the value of the account holder relationship.
An effective check program can often generate, on average, $10,000 in fee income per branch per year and should be an integral component of any financial institution’s growth strategy.
The Value of Check-writing Account Holders
Recently enacted regulations will continue to impact the bottom line for financial institutions and contribute to significant losses of revenue. Javelin estimates that the Durbin Amendment’s debit interchange cap alone will reduce revenues by $6.6 billion annually and change profitability in fundamental ways that financial institutions have yet to fully realize. Overdraft fee restrictions from Regulation E could mean an additional $5.6 billion annual hit to the industry. Banks and credit unions must tread carefully in today’s belt-tightening climate to offset these lost revenues. Financial institutions have already made front-page headlines as they proposed new fees, such as monthly account holder debit card charges. The public response was swift, sharp and negative. The impact on account holder retention remains in question.
In 2012 and beyond, finding the balance between account holder satisfaction and a competitive edge necessitates a careful reassessment of the account holder relationship. Not all accounts or account
holders are created equal, but the check-writing account holder represents a primary account relationship deserving attention.
Some institutions have already come to the conclusion that checks are more than just a traditional payment vehicle. Use of checks can, in fact, be indicative of engaged and profitable account holders. Check-writing account holders are worth targeting. Here’s why: Heavy check users, defined as those who have written at least five checks per month in the past 12 months, have an average checking account balance that’s more than twice the average balance of non-check users — $2,829 compared with $1,215. While check writers are distributed across all age groups, checks are more often used by high-income seniors, a profitable and loyal account holder segment with average assets of $240,000. And there’s more. Check writers have greater relationship tenure with their institutions and use a broader array of products than do other account holders. They’re more likely to have bank credit cards, loans, mortgages and CDs, and that means they’re exactly the account holders financial institutions want to engage.
Despite the focus on alternative payment options, checks still represent a significant share of dollar volume. In 2009, the Federal Reserve found that checks constituted 22 percent of total volume of non-cash payments. That was second only to debit cards. However, in terms of transaction value, the average check of $440.09 was 10 times greater than the dollar amount of the average debit card transaction.
Checks may have experienced lower visibility in recent years, but that was generally not due to any strategic shift on the part of financial institutions to move account holders away from using checks. Rather, financial institutions’ emphasis on products like debit cards, which generated higher revenues, encouraged some institutions to focus their account holders on using these products. But now, there are several reasons that the check’s visibility is increasing. First, the use of alternatives to checks is expected to decrease due to new regulations, so checks may experience some turnaround in usage. Second, as a result of a number of regulatory and technological changes, check processing is speeding up. Along with the positive bottom-line impact of Check 21, the ongoing transition to electronic check handling and clearing through changes like check conversion, remote deposit capture and check imaging will continue to make checks less time consuming and less costly to process. Third, the investments being made by financial institutions to support account holders with mobile deposit capture, remote deposit capture and envelope-free deposits at ATMs are increasing account holder convenience, enhancing retention and reducing the long-term expenses associated with check handling. Each of these initiatives has brought renewed viability and profitability to the check product.
New account holders present some of the greatest opportunities. An effective check program can often generate, on average, $10,000 in fee income per branch per year and should be an integral component of any financial institution’s growth strategy.¹ Leveraging existing program sales tools and encouraging frontline personnel to offer checks to new account holders, while educating these account holders on the many strengths of checks — near-universal acceptance, the safety of checks as compared with cash, and the ability to control and track expenditures — will create greater account holder engagement and build revenue during the new-account setup process.
Allowing consumers and business account holders to bank on their terms — making and receiving payments in the manner they desire most — also remains key to attracting and retaining account holders, preserving existing revenue streams and exploring cross-selling opportunities. As a representative of one large credit union says, “Even if [account holders] don’t use the checks, the fact that they order checks from you is a good sign that they are going to be engaged members of your institution.”
Maintaining the Primary Account Holder Bond
New payment methods come to market, but contrary to expectations, existing ones don’t go away. Rather, they find their place within the hierarchy of payment options. The check is still viewed as a trustworthy tool. It is familiar. And it is personal. It’s not unusual to detect an emotional connection when consumers talk about checks. They associate checks with gift giving and with payments to those in their inner circle, such as family members, service providers and shop owners. They also prefer writing checks for high-ticket transactions due to the extra feeling of security they get from having a paper trail. One midsize financial institution representative says, “People still feel a sense of comfort making their bigger payments by check. And they’ve got a cleared check right on their statement that shows they made the payment.” Consumers and small-business owners perceive checks as an important tool for controlling their accounts their way.
Checks are more than just a payment vehicle; check writing is an important engagement tool. As banks and credit unions look for new ways to offset losses associated with changing regulations and generate new revenue streams, check product strategies that build interaction with account holders warrant a serious look. Financial institutions may be surprised to learn that their most valued account holders are their check-writing clients. Seizing the opportunity to engage these account holders and develop strong relationships opens up potential avenues for cross-selling and bundling products and services while promoting account holder value and retention.
Check-writing Account Holders Yield Sustainable Benefits
Check Usage as a Loyalty Tool
Despite the profiles of check-writing account holders who are likely to yield higher than average return on investment, many financial institutions overlook this segment when rolling out loyalty programs. One large bank, however, rewarded customers for the total value of their relationship, including the checking account. The result? The checking account balances of its participants climbed an impressive 50 percent during the program. This suggests that check usage cannot only be a focal point for rewards, but it also can be associated with driving more valuable account holder relationships.
Check Orders as a Revenue Stream
With the ongoing search for new profit centers, the value of check orders and services as an additional revenue stream should be reassessed. Some financial institutions are successfully converting unprofitable check programs to profitable ones with new pricing strategies. Financial institutions that are best in class when it comes to generating check revenue are often able to integrate check sales at the new account desk, provide starter checks even to account holders who have opened accounts online and standardize selling procedures at the branch level to streamline the process. A standardized process can increase close rates and strengthen the bond between account holders and their financial institutions.
Check Services Create Account Holder Engagement
As implementation of the Durbin Amendment spurs financial institutions to establish account-associated fees such as monthly DDA charges, the time is right to actively strengthen the relationship bonds with account holders. The goal is to be the primary, if not the only, banking relationship. Today, about 30 percent of an average financial institution’s account holders are also transacting at other institutions. But new fees may cause many consumers and small businesses to consolidate their accounts and banking relationships. That’s why it’s time to be preemptive, and to identify and focus on high-value relationships by looking for account holders who use, and can benefit from, check services.
¹Javelin Strategy & Research, Facing Durbin: Enhancing DDA Value With Check-based Solutions