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Is it Time for Digital Banking Subscription Fees?

By Jim Bruene on May 21, 2014 5:58 PM | Comments

image Now that we are 30 years into the online banking era (and nearly 20 years of web banking), it's time to start making the channel pay its way (or at least contribute something). Even though your customers might think otherwise, there is no rule that says all your online and mobile banking must be free of charge.

Yet, across 10,000 U.S. banks and credit unions, only a handful are still charging for digital value-adds (other than expedited and/or P2P payments). The biggest outliers (all previously covered):

  • Regions Bank's variable mobile deposit fee dependent on speed of funds availability (post)
  • MyVirtualStrongbox (from DigitalMailer) deployed at 11 credit unions including Belvoir Credit Union; generally free, with optional fees for extra storage (post)
  • US Bank's per-item $0.50 charge for remote deposits (post)
  • Mercantile Bank's $4/mo consumer positive-pay service (post)

Please tweet new examples to @netbanker.

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Make Digital Banking a Profit Center
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Most digital innovations of the past 15 years have been justified with a combination of soft dollar benefits (aka intangibles) such as retention, customer satisfaction, competitive pressure, etc. Those are vitally important. But without profits/revenues, customer satisfaction is moot. 

So let's put an end to the "100% digital banking subsidy" and start charging something to those most likely to pay -- your digital power users.  If that segment coughed up an optional $3.95/mo for your Digital Gold account, you'd be earning a half-million dollars annually per 10,000 subscribers. That's money that'll come in real handy when the CFPB caps ODs at $15 each.  

What type of services might be included in this "gold/platinum/VIP/premium" account? It depends on your brand and market, but these could be relatively cost effective:

  • Priority service (4-hour turnaround time)
  • Dedicated email/text message address
  • Expanded "Help" hours/availability
  • Expedited funds availability
  • Higher limits
  • Additional security assurances/alerts/monitoring
  • Lengthier statement/image archives
  • Free intra-family transfers
  • Special edition (different skin) mobile banking app
  • Random membership perks (local deals, 2-for-1 dining, etc.) 

Check out more ideas in the Netbanker archives or refer to our annual planning report (subscription).

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Note: I run a variation of this topic every year or so, along with the occasional full report.

Comments
Categories: Fee Income, Pricing

Billpay: After 20 Years as a Loss Leader, Check/PageOnce Shows Path to Profitability

By Jim Bruene on April 24, 2014 4:07 PM | Comments

image

In the United States, banks have squandered $10+ billion providing free billpay during the past 12 years. But that's about to change, if the model from Palo Alto-based Check (formerly PageOnce) takes hold.

First, a history lesson for anyone born after 1980....

For the first few years of the online era (mid-1990s), "electronic bill payment" was offered by banks and credit unions with monthly fees of $5 or $6. That made it roughly breakeven, at least if you didn't count the sometimes heavy burden on customer service to solve problems caused by the very analog back-end of the so-called "electronic" service.

But then in 2002, Bank of America ruined even that by offering free billpay and advertising it widely on television (note 1). It even released internal data purporting to prove that what the bank gave up in fee income was more than compensated by intangibles such as higher deposit totals and lower customer churn (note 2). I like to kid myself think that if Bank of America had read their OBR more closely, it would be booking an extra $300 million per year in fee income (note 3); but I digress....

Back to present day. American consumers have grown accustomed to free billpay and I don't think that will change. But that's what makes Silicon Valley's mobile-billpay upstart so intriguing.

Let me introduce you to Palo Alto-based Check (still better known as PageOnce) which originally launched as a personal scheduler (hence the original name). It quickly morphed into the first native mobile PFM, landing on the scene in 2008, just a year after Mint launched.

But given the difficulty of monetizing budget-and-spending PFM, Check has tried several ways to earn revenue including offers, credit bureau monitoring, subscription billpay, and now transaction-fee-based billpay. Apparently, the last has the most promise, so the company rebranded as Check (with URL check.me), a big risk given the prominence of its PageOnce brand.

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How it works
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1. Choose biller from previous entries or add a new bill (see screenshot #1)

2. Enter account number with biller OR enter username and password and Check will download for you (screenshot #2)

3. Choose amount (screenshot #3)

4. Choose speed of payment (screen #4):
- Scheduled
- Send now: Standard
- Send now: Expedited

5. Choose payment type: Credit card, debit card or bank account (screen #5)
(Note: credit card option not available for paying other credit cards, which is a Visa/MasterCard rule according to the company).

6. Confirm and pay (screenshot #6)

And now for the twist. Were you imagining this service displayed across your spacious desktop browser? No way. This is mobile-only and works like a charm, though the fees are a little confusing (see below).

The mobile interface is great, using state-of-the-art technology tricks to cut down on data entry:

  • Mobile camera used to import card details, powered by Card.io (see screenshot #8)
  • Account aggregation to gather billing info (note 4)
  • Comfortable mobile layout for selecting payment options

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Pricing
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Check has free billpay of course. Just enter your bank account details, schedule the payment at least a week in advance, and you are good to go. However, for those not quite as organized, or who don't like revealing their checking account number, users can choose to pay a 4% fee (min $4.99) to pay via credit/debit card within 2 to 3 days. Or for $6.99 (flat), the payment can be made the next day.  

Here's the freemium pricing model:

   3-to-5 day ACH >> Free for any size payment (subject to account-specific maximums)
   2-3 day debit/credit card >> 4% service fee (minimum $4.99)
   Next-day debit/credit card >> $6.99 flat-rate service fee (note 5)

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Analysis 
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Check's billpay system is designed for the mobile channel. For the most part, it works. Allowing users to easily choose payment source and delivery date (including next day) is critical to making billpay valuable. Banks would be wise to use a similar design (or license from Check), to increase fee revenues. I think it's entirely possible, billpay becomes a standalone profit center under this model (note 6).

That said, with three or more payment sources combined with three payment speeds, scheduling new payments can get confusing, especially trying to determine tradeoffs between speed, source and price. When I originally set up the account, it seemed relatively straightforward. But when I went back the next month, it was hard to re-engage.

The company also needs to help users choose the payment method providing the best bank for the buck (optimizing price, speed and convenience). The company recently added a pop-up box (screenshot 7), that helps. And the applicable service fee is clearly shown at every step of the process, albeit in fairly small type (screenshot 6). I understand the company needs expedited and/or card-based payments to make a profit (similar to how PayPal defaults users to bank transfers instead of credit card payments). But users need to fully understand their options throughout the process (note 7).

Long-term the Check service is more valuable if its users become accustomed to paying all their bills from the site, even if most are free bank transfers. That way Check becomes the go-to spot for billpay, and are more likely to be remembered when users need expedited payments or a credit card charge when funds are low.  

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Screenshots
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#1 (left) Bills due list
#2 (right) Add a biller form

image           image 

#3 (left) Choose amount
#4 (right) Choose payment speed

  image          image


#5 (left): Choose payment source/type
#6 (right) Confirm payment screen (with fee disclosed)

image          image

#7 (left) Clicking on "?" on screen 6 launches a box with the fee schedule
#8 (right) Add credit and debit cards via scan

 image          image

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Notes:
1. For more details of the history of billpay pricing, see our post from 2004 and OBR #109, Pricing Online Services (subscription, Aug 2004).   
2. I have read dozens of these case studies and I still don't believe that anyone has proven that billpay CAUSES those results. Everything I've ever seen proved CORRELATION. Yes, billpay customers are more profitable and more loyal. But they would have been anyway without without subsidizing them with a costly, trouble-prone service. I still maintain that lifetime statement archives would be a better retention device, and far less expensive than free billpay (see OBR 118, Lifetime Statement Archives (subscription, June 2005).   
3. Assume Bank of America would have 5 million active billpay customers paying $5 per month x 12 months = $300 mil 
4. Hopefully, it's only a matter of time (and a licensing deal with Mitek), before Check imports the billing statement directly into its app.
5. Due to its various payment provider contracts, Check's expedited payment pricing doesn't always seem logical. For example, the company charges a flat fee of $6.99 for next-day delivery of any size payment. But for 2-3 day service the charge varies by payment size (4%) with a minimum of $4.99. So, for any payment above $175, it's cheaper to send overnight than via the slower 2-3 day service. On a $500 payment, that's a savings of $13 to send overnight. To pay my current statement balance, it cost $90 to send via 2 to 3-day service or $6.99 overnight, a whopping $83 savings. And Check does not mention this when you cue up a $2,000 payment.    
6. Besides fees based on transaction speed and payment source, we also believe there are significant potential revenues from credit lines used to cover payment account shortfalls and the newest fee income opportunity, expedited mobile check deposits (see IngoMoney , believed to be powering Regions Bank among others).
7. In the month I've spent testing the service, Check has made the service fee much more transparent, so I believe they are moving in the right direction. 

Comments

Why I Want My Auto Insurance Company to Track My Every Move

By Jim Bruene on August 7, 2013 6:56 PM | Comments

imageOur family has been lucky. Extraordinarily lucky. Eighty-plus years of mostly city driving, combined across four drivers, and not a single auto insurance claim (note 1). That means we’ve paid more than $100,000 (2013 dollars) in premiums for nothing, so far (note 2).

Actually, that’s not at all fair to the insurance providers. We’ve paid $100k for the peace of mind and potential financial help had we needed it (not to mention staying on the right side of the law). And it's been worth it.

That said, I wouldn’t mind paying less for the same peace of mind. And that’s why I love the idea of mileage- and behavioral-based insurance (note 3). I haven’t always been a model driver, but I was the first person in my extended family to regularly wear a seat belt and I’ve grown to be a relatively conservative driver, especially after becoming a parent.

And I’d love to be compensated for that.

That’s why I’m all for the next generation of “smart auto insurance” that connects to your on-board computers to measure:

  • Speed
  • Miles driven per day
  • Time of day driven
  • Acceleration
  • Braking
  • How hard turns are taken
  • Seat belt usage
  • GPS tracking

And eventually, even more difficult concepts such as:

  • Driver distraction
  • Driver impairment

Not only will I qualify for lower premiums (hopefully), the feedback from the tracker will be interesting (e.g,. historical maps of your routes) and could have a significant impact on the quality of your driving (since it will directly impact your rate).  I know there are serious big-brother concerns here, especially in light of the NSA scandals of the past few months. But it can all be opt-in, though eventually, those not opting in will face higher premiums.

Progressive Insurance is an early leader in this area. It's opt-in Snapshot tracking device (inset) has been used by more than one million customers (see screenshot below). Prospective customers can install the device free of charge for 30 days and track their potential savings online. You don't even have to be a Progressive customer to get the free trial. 

Bottom line: Unless regulators get in the way due to privacy concerns, it's inevitable that auto insurance, along with other types of property/casualty, will use behavioral metrics to price the risk. That will be a big change for the industry and will likely provide good openings for new entrants. 

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Progressive has 1 million drivers using its plug-in tracker (7 Aug 2013)

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Snapshot tracking log (via RoverGuide.com here)

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Notes:
1. There have been a few altercations with concrete pillars and such, but nothing severe enough to involve the insurance company. 
2. I know that I’ve now completely jinxed this, sorry family, and whomever we collide with.  
3. See previous post on Street Owl's safe driving app and Metro Mile's pay-as-you-go insurance.
4. For more on banks opportunities in insurance, see our full report here (Dec 2011, subscription)

Comments
Categories: Game-based, Insurance, Pricing

Op Ed: MRI Study Finds Consumer Interest in Fee-Based Bundles

By Jim Bruene on June 13, 2013 6:26 PM | Comments

by Dr. Dan Geller

Dr. Geller is EVP of Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at dan.geller@marketratesinsight.com.

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imageOne of the most significant findings from our  latest study on banking fee-revenue optimization (see note 1 below) is that the majority of consumers say they will pay monthly subscription fees for value-added financial services (see chart below and list right).

The average monthly fee that more than half (55%) of consumers are willing to pay ranges from $2.17 to $5.06 per month for each service. Of course, these stated amounts are an indication of relative perceived value rather than a pricing guide.

Furthermore, we found that consumers are willing to pay a higher overall monthly fee for the bundle than they would for each of the services individually. For example, study respondents indicated they are willing to pay $3.07 per month for a credit score report, $2.43 for account alerts and $4.27 for prepaid card for a total of $9.77. However, when the three were offered as a bundle, respondents valued them at $10.51, an 8% premium.

Bottom line: We believe there is a path for financial institutions to move customers "from free to fee" by bundling services in the optimal way.  

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Chart: Consumer Interest in Value-Added Banking Services

image 
Source: Market Rates Insight, June 2013

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Note:
1. For more info on these finding, MRI is offering a free webinar on Tuesday June 18 from 2:00 PM to 3:00 PM Eastern Time. Click here to reserve your space. The full report will be available for purchase beginning June 21 at <marketratesinsight.com>.

Comments

Fees: Regions Adds Time-Based Charge to Remote Deposits

By Jim Bruene on April 11, 2013 6:05 PM | Comments

image Retail bankers, we've had a sighting of that very rare bird, the North American Newfee. It was thought to have gone extinct in the fall of 2011, when anti-bankers shot down the last breeding pair, a malformed $5 debit card fee at Bank of America.

But surprise. Regions Bank has gone out on a limb and put a fee on the newest banking feature to sweep the nation, remote check deposit. And the bank didn't settle for the standard per-use fee (in trial at U.S. Bank), Regions got creative with a tiered price dependent on how fast you want the money (see note 1 for exact wording):

  • Immediate >>> 1% to 3% of check amount, with $5 minimum
  • Same night (8 pm cutoff) >>> $3 per check
  • Two days >>> $0.50 per check

There is also a potential $1 additional fee to temporarily raise your daily deposit limit to deposit a large check.

My take: I think Regions is smart to add fee(s) for the huge value mobile deposit delivers, though I think it would be better as part of a feature-laden bundle sold on a monthly subscription fee (note 2).

But tiered pricing is a novel idea worth trying. And I like the three options. But its probably too complicated for new users, at least the way it's presented in Regions FAQ (note 3). Also confusing matters, is the extra buck for checks larger than the user's limit. It's asking a lot for customers to decide among three options, especially when having to decipher jargon and timing rules such as "Funds are available during posting."  

image The multi-choice pricing scheme is an example of the paradox of choice. A theory (and direct marketing rule of thumb) that says you should keep choices to a minimum otherwise recipients become overwhelmed and just give up.

I think the bank would be better off starting with just two tiers, normal and expedited. Then introducing the third tier in v2.0 next year. 

But overall, congratulations to Regions for braving the unknown to see if this newfee has wings (note 6).

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Notes:
1. Here's how the fee is explained in the FAQ:

image

A somewhat better explanation is included on the mobile banking page:

image

2. For more info on fee-based banking services, our Online Banking Report on fee-based online services (subscription, May 2011).
3. Hopefully, the choices are better explained within the mobile user interface, which I was unable to see.
4. As expected, the initial reviews from Apple app users are harsh. Currently the bank has just a 1.5 star rating on the new version of the app containing mobile deposit. Down from 2 stars previously.  
5. Sorry for the prolonged bird metaphor. Sometimes you get bored at the keyboard (keybored?). It's also our second bird-themed post on fees. What's that about?
6. American Banker: http://www.americanbanker.com/issues/178_66/regions-offers-mobile-deposit-for-a-fee-1058090-1.html?

Comments

New Online Banking Report Published: Digital Overdraft Protection

By Jim Bruene on October 30, 2012 3:21 PM | Comments

clip_image002I've been wanting to write about overdraft protection for more than five years. It's a $30 billion market (note 1) with a number of serious issues, but I wasn't quite sure how it fit our mission of identifying opportunities in online and mobile banking. I finally realized the always-on digital connection to the customer fundamentally changes the overdraft equation. 

In the pre-digital age, a "bad check" was a labor-intensive process. Manually handling the item with slow snail-mail and/or phone calls to the customer was a hassle and a significant cost. The $8 NSF/OD fee in place when I started in banking (late 1980s) barely covered the variable costs, and certainly wasn't a major profit center.

clip_image002[8]Fast-forward 25 years. With sophisticated balance forecasting ala Simple (note 3), real-time debit authorizations, and virtually free instant customer communications, not to mention a hostile political environment, the days of $30+ penalty fees are numbered.

The transition will not be an easy one for banks. But there are ways to create customer-friendly overdraft-protection services, primarily delivered digitally, that win back a good portion of the lost revenue while making customers MUCH, MUCH more satisfied.

Our new 36-page report includes:

  • 25 promising overdraft-protection enhancements for the digital age
  • Pricing overdrafts and overdraft-protection services
  • Gallery of overdraft-protection websites at banks and credit unions  
  • Profile: Bank of Internet's OD-free checking account
  • Size of the U.S. market for overdrafts

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About the report
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Digital Overdraft Protection (link)
Making it a customer benefit again

Author: Jim Bruene, Editor & Founder

Published: 29 October 2012

Length: 36 pages, 12 tables, 7,600 words

Cost: No extra charge to OBR subscribers, US$395 for others here

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Notes:
1. United States fee income to banks and credit unions
2. Graphic from Southwest Missouri Bank
3. For more on balance forecasting, see our recent PFM report (June 2012, subscription).

Comments

Bank of Internet Launches No-Overdraft-Fee Checking Account

By Jim Bruene on September 27, 2012 7:00 PM | Comments

imageI've been working on a blog post, "overdrafts in the digital age," for a few days. But it's ballooning to the point where I may turn it into a full Online Banking Report. Or just publish it in several parts here.

Either way, I'm looking for examples of new approaches to overdraft protection. For example, Bank of Internet recently did away with the fee altogether on its Rewards Checking account. The bank won't necessarily honor the check (unless the user is covered by linked-account overdraft protection), but they won't charge a fee if they give it the heave-ho (note 1).

The account also boasts no monthly fee, an APY up to 1.25% (if electronic transaction minimums are met), an ATM fee rebate, Intuit's FinanceWorks PFM with Cardlytics-powered cash-back, mobile remote deposit (Mitek-powered, I presume) and Fiserv's POPmoney P2P payments. It's like a Finovate greatest-hits account.

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Bank of Internet homepage features Rewards Checking (27 Sep 2012)

Bank of Internet homepage featuring no-overdraft-fee checking


Rewards checking landing page (link)

BofI rewards checking landing page

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Note:
1. Bank of Internet won't impose a fee, but the merchant who submitted the check (and who will be dinged by their bank) very likely will. So it's not necessarily a fee-free event.
2. For info, our report on fee-based online services (subscription, May 2011)

Comments

U.S. Overdraft Revenues to Fall 50% by 2014

By Jim Bruene on July 3, 2012 6:48 PM | Comments

image Yes, that headline is pure fiction. 

No one can predict the fallout from the bank-bashing, CFPB-loving, election-year-posturing in 2012. But realistically, overdraft charges are about 100x more important to consumers than debit-card interchange, so it's an area that will be debated in the months and years to come.   

While I'm not predicting Durbin-like NSF/OD price controls, there is a material probability that it could happen. And even if the U.S. government steers clear of explicit price controls, we've likely seen the peak of OD/NSF income. So here's my take:

Best case: Real NSF fees drift slowly downward as penalty fees/pricing become more transparent through technology and various regulatory initiatives.

Worst case: See headline above

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Action items
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Hopefully, rising rates, higher home prices, and a healthier lending environment will provide enough revenue to overcome any declines in OD/NSF income. However, those macro factors are completely out of your hands. If you want to control your own destiny, I suggest you consider the following:

  • More overdraft protection credit lines: A credit line with a 12% to 18% APY (depending on credit score), paired with a $3 flat OD transfer fee, can be a very lucrative product. And it's win-win. Instead of hammering consumers with a massive penalty fee, you entrust them to pay it back when they see fit.
  • Fees for value-added services: It's not going to be easy charging fees for online/mobile services. But you are a business facing difficult choices in how to grow revenues, and subscription fees for new, value-added services are promising. 
  • image Insurance products: This is a huge, growing market that is relatively untapped by retail banks and credit unions. And distribution has yet to be moved to the online/mobile channel. So there is a huge opportunity for banks to be the ones to do that. At FinovateSpring, I was impressed by a startup, CoverHound, that has really interesting ideas on how to put a much-needed Web 2.0 spin to the product (demo here). We explored this in great detail in a December report. We also moved it to the number 1 priority for 2012 in our January report (note 2).
  • Offers and lead generation: Major banks already book major revenues through various third-party programs, such as credit monitoring, auto insurance, and statement inserts. The latest idea, which has attracted more than $200 million in venture capital, is tying merchant discounts and offers to credit and debit cards (note 3).
  • Branch right-sizing: I'm not saying that branches must go away, rather that the good ones morph into smaller, more efficient financial stores, with a big emphasis on small business, lending and yes, you guessed it, insurance. 

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Notes:
1. The neighbor test: Would you rather explain to your neighbor why you charged their daughter $36 for buying one too many lattes on their debit card, or would you rather tell them about your $3/mo "oops" service that warns parents when their child is about to do something stupid with their money. We write about value-added fees all the time in Netbanker, but the last full report is here (May 2011, subscription).
2. For more on banks offering insurance, see our full report here (Dec 2011, subscription)
2. For more on card-linked offers, see our full report here (Feb. 2011, subscription).

Comments

Pageonce Removes Billpay Subscription Fee in Favor of Per-Transaction Pricing

By Jim Bruene on April 25, 2012 6:33 PM | Comments (1)

imagePageonce, the largest PFM from a company not named Intuit, is abandoning its $4.95/mo subscription for mobile billpay and moving to a yet-to-be-determined transaction fee for each bill paid (note 1). The change was revealed at Monday's Future of Money conference and I confirmed yesterday with COO Steve Schultz.

image The company has been testing various price strategies and found that per-transaction prices were more popular with customers. Its model predicts a five-fold increase in volume with the new fee structure, moving from $40 million annually to $200 million (note 2).

Schultz speculated that customers are used to paying this way for financial services. And it helps that an electronic billpay transaction displaces an out-of-pocket cost of $0.50 or so (stamp & paper check).

Pageonce is positioning itself as a mobile wallet, starting from a position of strength on the billpay side, rather than POS transactions. Schultz says eventually they'll be at the point of sale and P2P as well. Because those three activities are all part of the "wallet experience."

But the company is not abandoning its PFM roots. Mobile wallets also need tools to manage and track spending. Pageonce is chock full of those. 

The company's business model going forward largely focuses on offers and lead-gen, similar to Mint. But it's also not completely subscription-fee averse. Its mobile credit score/monitoring service, Credit Guard, is priced at a very competitive $6.99/mo.

My take: While I can't point to specific tests of my own, most banks that have experimented with transaction fees have found them to be quite unpopular (of course, so are subscription fees). My advice <cue broken record>, for banks anyway, is to bundle several value-adds popular with the target segment and sell the package for a monthly subscription fee (or a discounted annual fee for your fans) (note 3).

How they do it:

  • Billpay processing is powered by TIO Networks (note 4).
  • Account aggregation was built in-house
  • Credit Guard is powered by IdentityIQ

Pageonce showcases its apps for every major mobile platform (link, 25 April 2011)

image

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Notes:
1. The company is testing fees from $0.25 to $1.00 per bill. I see no reason to undercut the price of postage, so I'd guess they end up closer to $1.
2. Assuming $1,000 in monthly billpay volume per active user, that implies the company currently has only 3,000 active billpay users.  
3. For more information on subscription pricing for financial institutions, see our Online Banking Report (May 2011).
4. See TIO Networks demo at FinovateSpring May 8/9.

Comments (1)

New Online Banking Report Published: Delivering that Secure Feeling

By Jim Bruene on April 5, 2012 6:07 PM | Comments

image OK, let's think this through. Consumers have been concerned about the security of online banking for more than a decade. Technology tools are available to ease their anxiety. So, why aren't these tools readily available?

The answer is that most security enhancements don't pay their own way in terms of reduced fraud. Therefore, these "nice to have" features languish in the priority queue with little hope of getting implemented.

So do we just let customers continue to needlessly fret about the security of their financial accounts?

No, that just irritates already fed-up customers and invites more independent competitors to the table to provide the missing benefits (e.g., BillGuard, Credit Karma, Mint).

Instead, why not move to the win-win solution: Charge an optional subscription fee for extra "peace of mind," but only to customers who want it. Or offer the value-adds free of charge for customers who help you lower costs by using self-service channels and foregoing printed statements.  

But wait. Aren't fees dead after the BofA debacle a few months ago?

While that was a very real customer backlash, optional fees are still possible. Just keep these rules in mind:

  • Fees for extra security should NEVER be mandatory; instead, offer a "security bundle" that goes above and beyond the normal state of the art
  • Do not charge a fee for any security feature you already offer free of charge (the big problem with the ill-fated debit card monthly fee)
  • Do not charge for a security feature that is typically delivered free of charge by others in the industry
  • It's better to bundle a group of extra security features into a relative low-priced subscription bundle

In our new 48-page report we cover:

  • 12 design elements to make your website feel more secure
  • 7 potential positive elements for your business case
  • 5 talking points for staff education before implementing a subscription fee
  • 37 potential security enhancements to bundle into an "extra security" subscription offering
  • 72 additional security features to consider
  • 5 customer segments to target with a fee-based package account
  • Overview of three promising security services:
    -- Anti-virus for transactions from BillGuard
    -- Self-service suspicious activity reporting from Bank of America
    -- Virtual safe deposit from Northwest FCU, powered by DigitalMailer

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About the report
__________________________________________________________________

Delivering that Secure Feeling (link)
Help consumers reduce perceived risks (for a price)

Author: Jim Bruene, Editor & Founder

Published: 4 April 2012

Length: 48 pages, 8 tables, 12,000 words

Cost: No extra charge to OBR subscribers, US$395 for others here

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Sample screenshot

: Barclays (UK) offers online banking customers free anti-virus software from Kaspersky

clip_image002

Comments

Op Ed: Rise of the Feenix

By Jim Bruene on January 19, 2012 5:23 PM | Comments (2)

by Michael Nuciforo

Editor's note: This post was written by Michael Nuciforo, a Mobile Banking Consultant at Keatan. He previously worked at ANZ on a number of developments, including goMoney, and more recently was Head of Mobile Banking at RBS managing the UK Retail portfolio.

image Banks has perfected what I refer to as the ‘negative pricing model.’ In simple terms, fees are charged when customers make mistakes. We are all familiar with it. It is the annoying cost of returning a DVD late, or staying too long in your parking space.

At present, banks rely significantly on revenue generated from fees when customers fall afoul of their terms and conditions. Amongst all the doom and gloom of regulatory pressure, the euro debt crises, and record low margins, could mobile banking be the right service to implement a ‘positive pricing model’?

Tiered charges for access to additional features and content have become common due to the popularity of games such as FarmVille and Sims. This is great news for banks as the market has likely reached the right point of innovation, access and acceptance to allow for the monetization of mobile banking.

Now that most banks have launched first-generation mobile services, new features are perfect for tiered pricing. Areas such as NFC payments and remote deposit-capture are a great place to start. They are tangibly more convenient than existing processes, and are designed to leverage the specific capabilities of a mobile device.

But can banks pull this off? Or will it just be seen as yet another annoying banking fee?

When implementing a pricing model, banks need to be clear about their strategy and objectives. For the model to work, it is critical that unique, mobile-specific services are delivered to warrant the cost. And banks shouldn’t charge for services that they already offer for free today. This will only anger existing users. They should also avoid charging for services available in other channels for free, although some exceptions could apply. Banks need pricing that is fair, transparent and that rewards loyalty as well.

Any new fee will disappoint some customers. Banks should also expect negative media attention at first. This will happen any time bank and fee are included in the same sentence. Banks need to be proactive about engaging regulators during the process and communicating actively to customers. It is important that fees are integrated seamlessly into the customer journey. Regular enhancements should also be made to the service. Success will ultimately rely on the quality of new features.

With traditional revenue streams under attack, and investment in mobile growing, pressure will come on mobile leaders to justify the costs. The honeymoon period for mobile banking will be tested at some stage. Customer retention and transaction migration are fine, but are they enough for your senior executives? And can they be accurately proven?

With customers now familiar with this pricing model in other facets of their everyday life, it is important that banks also take the opportunity to do this now. Otherwise mobile banking, like online banking, will become a free channel for life.

Comments (2)

What is the ROI of banking innovation?

By Jim Bruene on June 3, 2011 11:33 AM | Comments

image An executive on the front lines of product development at a major financial institution recently asked me this question:

How can I prove that innovation really matters to the bottom line?

I've been a "product guy" my whole career so I take it for granted that "building a better mousetrap" eventually trickles down to a boost to the bottom line. That worked at Microsoft, Apple and Caterpillar (my first job).

But they are manufacturing companies. That better mousetrap, be it Win95, the iPod, or a D10 tractor, brought in direct, usually profitable, revenues.

It's harder if you are a retailer. If the Gap spends a million dollars to improve search and discovery on its website, will it really sell enough extra jeans and sweaters to make the investment back, let alone earn an acceptable return?

Banks are both retailers (branch and online) and manufacturers (checking accounts, loans). But today, the P&L from their digital efforts is more like the Gap than Apple. You have to sell a lot of extra checking accounts and car loans to justify even a modest website investment. This has held back digital investments for 15 years (see note 1).

But what if banks started acting more like a manufacturer when it comes to digital products, by creating new services to package and sell on their own merits.

For example, instead of spending a couple hundred thousand every year to give everyone remote check-deposit capabilities free of charge, create a new digital product called, The Magic Check Deposit Service, and sell it for $2.99/mo. This product not only reduces costs, since it will have far fewer lapsed and/or clueless users, but also pegs a monetary figure to the service, thereby increasing its perceived value even if you end up giving it away to your best customers.
______________________________________________________________________________

The Numbers
_____________________________________________________________________________

Let's crunch a few numbers. Assume it costs $0.50/mo to support each user + $0.25 per check deposited + $20 per tech support call (I made these up so don't quote me).

Free service:
Cost = 50,000 users x 0.67 checks/mo + 1,000 support calls per year = $420,000
Fee revenue = $0
Customer retention value = ??? (some positive number)
---------------------
Net = ($420,000)

Subscription service:
Cost = 5,000 x 4 checks/mo x 100 support calls per year = $92,000
Revenue = 5,000 x $2.95/mo = $177,000
Retention value = ??? (same as above)
--------------------
Net = +$85,000

Change in net (delta) = $500,000
______________________________________________________________________________

Bottom line
__________________________________________________________________

With either approach you get to tout the benefits of the new innovation to capture the branding value. But under the subscription model, only those who really stand to benefit from the service use it, and you end up with a small profit or at least less of a loss. In the above example there is $500,000 gain compared to the free model.

Yes, this is over simplistic. Yes, you'll take some grief for charging when others are giving it away. It's possible you might even lose a few customers, but not $500,000 worth. And the biggest benefit of all, you can actually afford to create the new service now, instead of tabling it for five years until it becomes a competitive necessity. 

Back to the original question. Honestly, I have no idea how to prove that innovation has a good ROI. What I do know is that for the past 100+ years, clever manufacturers have created billions in value by beating the competition with new products and services. I'm pretty sure financial companies will do the same with their online and mobile offerings.

-----------------------------------------------

Note:
1. See our current Online Banking Report, Creating Fee-Based Online & Mobile Banking Services.

Comments
Categories: Fee Income, Pricing, Strategies

New Online Banking Report Published: Creating Fee-Based Online & Mobile Banking Services

By Jim Bruene on May 23, 2011 2:46 PM | Comments (1)

image The scariest thing about being a banking industry analyst, besides boring your family & friends, is looking back at the advice you handed out 5, 10 or even 15 years ago. While I've had my share of hits and misses, one thing I've been particularly adamant about, is the need to create fee-based online financial services. Sadly, this is one that's been completely ignored so far (see note 1).

If U.S. financial institutions had charged an average of $1 per month per user (note 2) over the past decade, it would have generated $10+ billion in incremental profits, much of which would have been reinvested into the channel. 

Had that happened, we'd already have:

  • Ironclad security
  • Highly personalized 2-way alerts & messaging
  • Integrated PFM and credit monitoring
  • Responsive online/email customer service
  • Killer mobile banking and iPad apps
  • And much more

But what matters now is where do we go from here? Consumers have been trained to expect everything, even costly services such as online billpay, to be free of charge. Anyone who tries to charge fees for the existing state of the art risks massive backlash from customers and the media.

The way to introduce fees after the fact is to charge only for new value-added services such as those listed above. That way, no one pays fees unless they want the new benefit. It's the classic freemium model, and it works well across a number of industries, just ask LinkedIn.

Our latest report lays out 33 value-added modules that could support a la carte subscription fees. We look at eight use cases where these modules are bundled together for various-high value segments:

  • Power mobile users
  • Road warriors
  • Families/parents
  • Small/micro business
  • Homeowners
  • Financial trackers
  • Empty nest/retirees
  • VIPs

Currently, the best examples of multi-tiered pricing in the United States is business online banking where a number of banks and credit unions have a basic free option and at least one higher-end "cash management" solution (see Western Bank screenshot below).

______________________________________________________________

About the report
______________________________________________________________

Creating Fee-Based Online & Mobile Banking Services (link)
Pricing 2.0: How new revenue models will propel online/mobile banking to the next level

Published: May 18, 2011

Author: Jim Bruene, Editor & Founder, Online Banking Report

Length: 44 pages (10,000 words), 17 Tables

Cost: No extra charge for OBR subscribers, $395 for everyone else (link)

---------------------------------

Western Bank's online banking pricing matrix (link, 15 May 2011)

Western Bank's online banking pricing matrix

--------------------------

Notes:
1. At least in North America. Financial companies in other areas of the world have been more successful with fee-based services.
2. This is an average amount. Most users would pay zero, but with 20% paying $5/mo, you get to the $1/mo average. 

Comments (1)

Out of the Inbox: ING Direct Raises Price on Overdraft Credit Line by 55%, Still Undercuts Competition by 99%

By Jim Bruene on March 22, 2011 10:49 AM | Comments (1)

image This has to be the best notification of a price increase I've ever seen (see first screenshot).

ING Direct  (USA) famously does not charge OD/NSF fees on its checking account, Electric Orange. But that's a bit of a moot point since the bank doesn't offer paper checks, making it difficult to inadvertently go negative.

However, the bank does allow overdrawing by few hundred dollars if you so choose. And it charges interest on those "overdrafts" at a variable rate equal to 4% above prime, currently 7.25%. The bank reinforces the no-fee pricing in its standard low-balance alert (see second screenshot below).

But that low APR is heading upwards. Last night I received an email notification that effective May 15, the variable rate will be increasing to 8% above prime, or 11.25% today, a 55% increase. That's still relatively reasonable for unsecured credit.

But the bank's email doesn't focus on APR. After clearly disclosing the price increase, it lays out a comparison of what a $100 overdraft would cost the average U.S. consumer for one week, $31, vs. the $0.31 you'd owe ING Direct after 7 days. There are no other fees, transaction or annual, for the ING credit line (complete terms here).

Well played.

ING Direct email disclosing OD credit line APR increase (21 March 2011)

 

ING Direct email disclosing OD credit line APR increase (21 March 2011)

Overdraft notice (22 March 2011)
The bank reinforces its no-fee policy in its email OD alert.

ING Direct (USA) Overdraft notice (22 March 2011)

Comments (1)

U.S. Bank Set to Launch Fee-Based Remote Deposit Capture for Retail Customers March 14

By Jim Bruene on February 21, 2011 12:48 PM | Comments (4)

image Five months after we first spotted the link (see previous post, note 1), U.S. Bank is telling online banking users that they'll be able to use the new PC-based, remote-deposit function on March 14. Customers will use standard all-in-one scanner/printers to submit checks.

The bank has decided to launch with a $0.50 per-item fee for retail customers. While I'm all for fees for value-adds, my response is mixed on this one.

The fee makes sense in many ways:

  • Value: The customer receives a very real time savings here, and many would burn that much in gas, driving over to a branch. So $0.50 sounds pretty reasonable.
  • Changing perceptions: It's good to start weaning customers off the belief that every new feature is provided free of charge.
  • Fairness: Customers that use the service, pay for its costs. That's fair pricing for everyone.
  • Optional: No one has to use the service; there are acceptable free (branch, ATM) or lower-cost (mail) alternatives for most customers.

But here's what's bothering me about it: 

  • Sends the wrong message about self-service: If the bank starts charging a dollar or even fifty cents to deposit an item in the branch, then the online fee makes perfect sense. But if the same service is free in the branch, I think it sends the wrong message to online users.
  • Discourages trial: For nearly all potential customers, this is new and unproven technology. They at least need a free trial to get a feel for it.
  • Is it worth the trouble? If U.S. Bank gets 50,000 items remotely deposited per month, the bank nets $300,000 per year in fee income. Would a free service save more than that in labor, while introducing the timesaver to far more customers, perhaps even driving some new accounts?

Bottom line: While it will cut usage dramatically, a fee makes sense if you want to add a new feature without increasing bank costs. And evidently, U.S. Bank doesn't believe the higher number of deposits garnered by a free service would save enough labor to overcome the lost fee revenue. So the pros must outweigh the cons.

Nevertheless, I'd prefer to see remote deposit bundled together with several other value-added features for a small monthly fee, e.g., $2.95 for a "power user" electronic account.  

Kudos to U.S. Bank for making remote deposit available to retail customers. I look forward to trying it, but given how much trouble I've had with my all-in-one scanner over the years, I am much more likely to become an active user of a smartphone version. 

U.S. Bank's Make a Deposit page inside the secure online banking area (20 Feb. 2011)

U.S. Bank's Make a Deposit page inside the secure online banking area (20 Feb 2011)

-------------------------------------

Note:
1. The service has been piloted in several states, so I'm assuming that's why it's been on the menu.

Comments (4)

Unitus Community Credit Union Charging $2 Monthly for Geezeo-Powered Online Financial Management (PFM)

By Jim Bruene on January 6, 2011 6:09 PM | Comments (1)

image In what I believe is a first in the United States, a financial institution has begun charging a small fee for online personal financial management (PFM) services.

image Portland, OR-based Unitus Community Credit Union, with 68,000 members and $800 million in assets, launched its new Geezeo-powered PFM Total Finance in late 2010. Members pay $2 per month for the service following a 30-day free trial.

According to Laurie Kresl, VP planning & biz development at Unitus, the CU has 661 members signed up for the service as of this week, or about 1% of its member base, which is a solid start considering the monthly fee is not mentioned on the public website, but is disclosed as members sign up for the service (note 1). 

Quick take: While online/mobile access will remain relatively fee-free, we'll begin to see more fees for optional value-added services such as advanced financial management. Congratulations to Unitus for taking the lead on this one.

Unitus CU homepage features its new PFM offering (6 Jan. 2011)

image

PFM landing page (link)

Unitus Credit Union Geezeo PFM landing page

Note:
1. To sign up, customers first log in to online banking. The CU says it plans to add fine print to the landing page (above), disclosing the monthly fee.

Comments (1)

Charging More for Branch and Call-Center Transactions Compared to Online Ones

By Jim Bruene on November 4, 2010 6:35 PM | Comments

image Recently, I spent 34 frustrating minutes in a branch completing a single international wire transfer. And 22 minutes of that was with the branch manager. How much did that cost the bank compared to the same transaction online? 2x more? 5x more? 50x more? 

And more importantly, what’s the customer experience?  How much happier would I have been to do the transaction online in the comfort of my own home? 2x? 5x? 1000x?

In this particular case the question is moot, because my primary bank does not support online or call-center wires unless I upgrade to a much-pricier commercial checking account.

But for those financial institutions that do offer a choice, the math is pretty clear. It costs WAY less to complete a transaction online and (most) customers are WAY happier to complete routine transactions online, assuming sufficient security is in place.

Yet, many banks still price the services the same regardless of the channel. While this is understandable from a simplicity standpoint (and you don't want to alienate branch/call center users), it's time to start using price to reward self-service.

For example, in my most recent Chase business checking account statement, I noticed that the bank is instituting a new fee structure for stop-payment requests. Beginning Nov. 13, each request made in branch or over the phone will cost $32. In comparison, online requests will be $25 each, a 22% savings. Wires are also $5 cheaper online than in the branch (see below).

image

The downside is that customers may be outraged by a $20/$25 fee for a transaction they initiate themselves online. But the discount, combined with the time savings, should help ease the pain.

Comments

Can Banking Income Woes Be Fixed with a $5.95 Fee?

By Jim Bruene on July 17, 2010 9:33 AM | Comments

imageWhen I see large numbers, say a billion or more, I mentally divide it by the number of people impacted to make it more meaningful. In Seattle, we are about to embark on our very own Big Dig, replacing the 1953 waterfront viaduct with an underground tunnel. The $2 billion cost estimate comes out to about $1,000 per person in the Seattle metro area, and that's before the "expected" cost overruns (see note 1).

Bank of America announced yesterday that due to the just-passed financial reform, its revenues will drop by $4.3 billion annually (WSJ article), more than two waterfront tunnels every year. But across 55 million customers, that's only $78 per person. Coincidently, that's exactly two $39 debit-card overdrafts.

To make up for the lost revenue, the bank needs about $6 per month in fees across the entire customer base (note 2). I can envision a package of new and existing benefits pitched to customers to convince them to pony up the $5.95/mo in new fees. For example:

  • Real-time mobile/desktop alerts
  • Lifetime data backup in the cloud
  • Linked OD protection
  • Instant bill pay with guaranteed delivery  
  • Remote deposit capture
  • No-hold customer service with guaranteed same-hour call back
  • Custom fraud tools with fraud-loss guarantee
  • Online financial management tools
  • Desktop/mobile apps fine-tuned for specific customer segments
  • Rewards program for self-service/estatements
  • Two-way alerts
  • Monthly credit score

It will take years to make the transition. But in the end, consumers will get used to paying modest monthly fees instead of facing $39 overdraft-fee shocks several times per year (note 3). And banks/credit unions can spend less time soothing exasperated customers. It could be a win-win.   

Notes:
1. Luckily, we have municipal debt, so we can pay this off at $75+ per person, or coincidentally again, about $5.95/mo for 30 years. And the state is helping out too, so the Washington population will be pitching in to help lower the actual cost to Seattleites.
2. This is an extremely simplistic example to make a point and does not factor in cost cutting, commercial banking revenues, etc. 
3. Since banking is highly competitive, any new fees will work only to the extent the overall price/value of the services remains competitive.
4. For more ideas, see our annual planning report, which includes a section on potential fee-based online/mobile services.

Comments

Making Debit Overdrafts into a Real Service Again

By Jim Bruene on July 7, 2010 4:36 PM | Comments (2)

imageIn 1988, as a new product manager at a long-since-merged-away bank, one of the first things I did was send a memo to my superiors pointing out that our overdraft fee of $8 was significantly less than our peers. And that we might want to consider raising ours to the industry standard $10. That little change added a million dollars to our bottom line and wasn't a half-bad start to my career there. 

So I've always understood how difficult it is to resist the temptation to raise OD fees. That said, there was no excuse for the debit-card excesses that led to the opt-in regulations taking effect this summer. No one should have to pay $39 extra for their morning coffee/donut fix.  

So as much as I detest price controls, I'll have to admit I've been looking forward to the industry efforts to turn debit overdrafts into a value-added service instead of the huge negative penalty they had become.

Ultimately, I see small overdrafts being priced more like mini-loans with a combination of withdrawal fees in the same range as foreign-ATM fees ($2 to $4 each) plus an interest rate or nominal daily fee based on the outstanding balance. Then, if I'm at the store and need $40 more for dinner groceries, I can decide to take the loan, pay the extra $5, and go about with my evening plans.

It's a win-win. I'm happy the bank/credit union gave extended me a little credit in a tight situation, and the bank makes some much-needed fee income, albeit in $3 increments, instead of $39. While the lower prices won't replace lost fee income dollar for dollar, and underwriting/credit issues must be addressed, customers will be happier and more loyal, employees will feel better about the value delivered, and in the long-term, things can get back to a more normal price/value relationship.

I'll be chronicling some of the most interesting implementations of value-added OD protection during the rest of the summer. I looked at Truliant Federal Credit Union a few weeks ago (here). Next up, Wells Fargo.

Comments (2)

Fifth Third Bank Bundles Free Credit Report Monitoring & Identity Theft Protection into Checking Accounts

By Jim Bruene on September 2, 2009 4:21 PM | Comments (1)

imageChecking account profits are being attacked on several fronts. Near-zero short-term interest rates have destroyed the profitability of the balances. Regulators and activists are putting pressure on penalty fees. And consumers are loath to pay monthly charges for what's been positioned as a free service for so long.

So how is it that Fifth Third Bank is able to bundle a service into its checking account that typically costs consumers $12 or more per month? They are bringing back the monthly fee (see note 1), charging either $7.50 or $15 per month for a so-called package account (see options below). It's a strategy right out of Marketing 101: figure out what customers want, then build the  product, package it right, promote it well, and price it for the value delivered.

I believe Fifth Third has taken the right tack with its checking accounts, though it should go even further (see analysis). The bank offers two non-interest checking account bundles (PDF comparison here), neither of which are free of charge no matter how high the balance (note 2). Instead of offering fee waivers, the bank has bundled full-service three-bureau credit report monitoring and identity theft services powered by Affinion (link to Fifth Third Identity Alerts). And the monitoring is available for BOTH names on a joint checking account (note 3). 

  • Secure Checking at $7.50/month, comes with free credit report
    monitoring and identity theft protection (valued at $9.95/month per person)
  • Gold Checking at $15/month, comes with the same free ID protection &
    monitoring plus free nationwide ATM access

Analysis of Secure Checking
imageNow more than ever, customers are craving security and safety in all things financial (see yesterday's post). Bundling identity theft/credit report monitoring in checking accounts is an excellent way to address customer concerns AND differentiate your account in the marketplace. And naming it Secure Checking helps drive home the key benefit.

I like what the bank has done. It would be even better if it highlighted more of its current security features available in mobile and Internet banking (note 4):

  • Email alerts
  • Mobile text alerts
  • Secure storage of estatements
  • Transaction monitoring for fraud and error
  • Other security protections as outlined on its security page
And down the road, they could enhance the account with additional features such as (note 5): 
  • Out-of-band authentication via text message
  • Disposable credit/debit account numbers
  • Long-term (7+ years) secure transaction archives
  • Enhanced fraud protection guarantees
  • Dedicated security reps on call 24/7 to help out in the case of a suspected problem
  • Software and tools to safeguard online banking (e.g., Trusteer, Authentium, Check Point)

Fifth Third Bank non-interest checking accounts (link, 2 Sep 2009)

image

Secure Checking landing page

image

Notes:
1. Ref: Is This the End of Free Checking?, SmartMoney Magazine, 31 Aug, by Kelli B. Grant
2. The bank does offer an interest-bearing checking account with its $15 monthly fee waived with a $2,000 average balance in checking or $20,000 across all deposit and investment products. The bank also has a free non-interest checking account option.
3. I'm not sure the bank gets enough mileage out of covering BOTH account holders to justify the additional costs. To improve profits, the bank should consider a modest additional fee (approximately $5/mo) to cover joint account holders. 
4. These benefits are hidden behind a tab that most consumers, including myself on my first two passes, will likely miss (see second screenshot above).
5. For more info on how to package security benefits into your services, refer to the following Online Banking Reports: Marketing Security (June 2005) and New Techniques for Securing Online Banking (Sep 2008).

Comments (1)

Where Are the Online Banking Fees?

By Jim Bruene on May 11, 2009 5:24 PM | Comments (2)

imageI am rarely at a loss for material when looking for examples to illustrate a point about online finance. Across thousands of financial websites, there's an almost infinite supply of novel new services, marketing strategies, and promotional efforts. 

However, there's one area with almost zero innovation. Pricing.

In the United States anyway, nearly every bank and credit union offers online, and now mobile, banking free of charge (see note 1). It's an appealing price point for sure, but it also hampers the ability of financial institutions to develop novel service offerings. It's a game of minimizing channel costs rather than maximizing returns.

However, several interesting new services that are at least trying to charge fees have recently shot up in online personal finance. Two debuted their new services at FinovateStartup April 28 (see notes 2 & 3; videos of their demos will be available online shortly):

  • LowerMyAssessment.com is charging $125 to help consumers lower property taxes on their homes
  • Home-Account is charging a $8.75/mo to help users manage their home mortgage

We'll look at both companies this week starting with LowerMyAssessment.com.  

Notes:
1. We covered online banking pricing in a 2004 Online Banking Report (here). While the report is nearly five years old, sadly little has changed, so it remains relevant to today's situation in the United States. 
2. In addition, at FinovateStartup we saw several new services that could increase payments-related income for banks, including the alt-payment companies, especially Acculynk and Moneta, offering revenue sharing and interchange fees for banking partners, and MicroNotes, which showed a platform that provided fee income to delivery-targeted advertising within the bill-payment function.
3. Also, Wells Fargo should be given credit for rolling out a fee-based storage solution integrated within its online banking services. The vSafe program costs $4.95/mo and up based on storage capacity desired. 

Comments (2)

How Can Online Banking Develop its Own Black Card?

By Jim Bruene on February 18, 2009 10:00 AM | Comments (2)

image Yesterday, I looked at a list of free services likely to come under pressure as banks work on the Herculean task of returning to normal profitability. One area that's likely to remain free for the foreseeable future is online and mobile banking, at least the core account-access portion of it.

But we continue to believe that financial institutions are missing a revenue opportunity to provide premium fee-based services to certain segments.

imageIf American Express can command $2500 per year for its black Centurion Card and Barclays $495 per year (see note 1) for its slightly more pedestrian Black Card launched in December (see note 2), why can't banks get $10/mo for a similar premium version of online and mobile banking? The short answer: They haven't tried.

Just for the sake of discussion, here's a "gold online banking" service for which I'd pay $15 per month without a moment's hesitation:

  • High-end website and iPhone app
  • Long-term (7+ years) online storage of images, transactions, statements
  • On-demand credit score like Credit Karma 
  • Credit bureau alerts when negative items hit
  • Account aggregation with weekly summaries like Mint
  • Email customer service with 30-minute or less turnaround time
  • VIP phone and tech support with no phone tree
  • No overdraft/NSF charges (within limits of course)
  • Travel rewards/sweepstakes on electronic transactions
  • Pre-filled one-click credit application
  • Extra security options
  • SMS balance inquiry
  • Iron-clad, no-fine-print security guarantee with 100% immediate reimbursement and emergency credit line

For more elaboration on these benefits, see our Online Banking Report on Pricing Online Services.

Visa Black Card homepage (15 Feb. 2009)
Includes one-page online application

image

Note:
1. The benefits of the Visa Black Card are similar to those from many gold/platinum cards. One of the biggest differentiators is free limited membership to Priority Pass which gets cardholders into 500 airport lounges in 250 cities. However, according to the FAQs, Black Card holders are limited to two complimentary visits per year, so this would cost $154 annually if purchased directly from Priority Pass. In fact, for $349 annually, you could get unlimited access to airport lounges. 
2. The Visa Black Card has been advertised with full-page ads in the New York Times, the latest on 10 Feb. 2009 on p. A5 (national edition).

Comments (2)

Will the Troubled Banking Sector Start Pulling Back on Free Consumer Services?

By Jim Bruene on February 17, 2009 10:32 AM | Comments (4)

image One thing that's clear in today's banking crisis: many credit products were severely underpriced relative to the risk. That means the entire financial services industry must reprice their product lines to get back to a "normal" level of profitability.

For consumers and businesses, that means higher rates, more fees, and most likely fewer free services. One thing that will surely be scaled back is the extensive branch system, which in the United States amounts to one full-service, often elegantly equipped, bank branch for every 1,000 households (see note 1).

But what other free services will disappear? Here are the current freebies that banks will closely examine in coming years. In most cases, the free benefits aren't going away entirely, they'll just be available to fewer customers. They are listed in order of most vulnerable to least. 

  • Free online bill payment: In our opinion, across-the-board free bill pay has never made economic sense for most financial institutions (note 2). We expect banks will begin charging the less-profitable portions of their customer base for it. 
  • Free branches on every corner: Branches are a huge, vastly underused, capital expense. There will be significant reductions in this area during the next 20 years (note 1). Branches aren't going away entirely, but they'll be far fewer, they will be smaller, and they will charge fees for many services currently offered free of charge.
  • Free credit card annual fees, interest-free grace periods, and rewards: Non-revolving credit card users get a great deal under the current system, 30-to-45 days interest free grace period, plus card rewards, and little or no annual fee. Card issuers, hit by lower borrowing by their prime customers and higher default rates from others, will restrict free services for convenience users.  
  • Free mailed statements: As the cost to mail statements continues to rise along with the percent of customers with online access, this freebie is destined for extinction. As with most benefits transitioning from free to fee, less-profitable households will see the fees first.
  • Free telephone customer service: Telephone customer support is relatively inexpensive compared to branches since most routine questions are answered automatically and human support can be outsourced to lower labor-cost areas. But we expect that free human customer service will eventually be limited to the more profitable households, with others paying per-use or annual fees.
  • Free ATM usage: Most banks will continue to offer free ATM use across their own networks, but will probably add qualifying criteria, such as minimum balances, debit card usage, direct deposit, and/or estatement usage.
  • Free checking: Because "free" checking isn't really free after factoring in penalty fees and cross sales, it's not likely to disappear from a bank's marketing toolkit. However, unprofitable customers will see even more fees tacked on to their accounts, such as per-use charges for branch services, telephone support, etc.
  • Free online/mobile banking access: Online and mobile access is an inexpensive service to provide and is likely to remain free for most customers. However, we expect banks and credit unions to begin offering upscale "gold" versions that will carry annual/monthly fees for more benefits.

Notes:
1. For our take on the future of bricks and mortar, see Online Banking Report: The Decline of the Branch.
2. For more info on pricing bill pay and other online services, see Online Banking Report on Pricing.

Comments (4)
Categories: Pricing, Strategies

Loanio Shuts Down (updated with statement from Loanio)

By Jim Bruene on November 26, 2008 12:35 PM | Comments (2)

image It's 3 for 3 now. All major P2P U.S. peer-to-peer lenders have been shut down this year by the SEC (see note 1). First Lending Club in March, then Prosper Oct. 15, and finally Loanio this week (see note 1).

Here is the statement I received from Loanio founder Michael Solomon this afternoon:

In light of the recent cease-and-desist ruling issued to Prosper Marketplace by the Securities and Exchange Commission, Loanio voluntarily suspended its operations. We were not contacted by the SEC or any other government agency. The SEC ruling on Prosper, combined with the recent registration of Lending Club, removes all ambiguities as to the Commission's legal interpretation on the issue of whether P2P promissory notes, in all of their varieties, are considered securities under current law.

Regulators have concluded that loans created in these networks are, in fact, securities and must be registered as such. You can read the SEC's logic in its Prosper filing published this week (here).

I have mixed feelings. While I applaud regulators for taking the initiative to understand this new way of lending/investing, I find it a bit ironic that a $100-million self-regulating and relatively transparent marketplace receives heavy-handed treatment while multi-trillion dollar financial products grew relatively unchecked in recent years (see my prior editorial on the matter).

The good news is that Lending Club has proven that SEC registration need not be a death sentence. The startup successfully completed the registration process after six months, relaunching at our Finovate event Oct. 14. The company has funded $2.6 million in loans since reopening.

We are hopeful that Prosper, which has $40 million in venture funding, will be back in business in early first quarter. Angel-funded Loanio may need to raise money to finance the registration process.

image

Notes:
1. Last month (here), the Loanio founder predicted that at some point he'd also need to register with the SEC.

2. Fynanz and GreenNote, the P2P student loan lenders, appear to still be accepting lender funds.

Comments (2)

BancVue/FirstROI Launches Checking Finder

By Jim Bruene on June 17, 2008 1:56 PM | Comments (3)

image FirstROI, a division of Austin, TX-based BancVue (previous coverage here) launched its CheckingFinder service June 2. FinovateStartup attendees received a sneak peak in April and rewarded it with a Best of Show award (video here). The innovative service helps consumers find the best BancVue-powered rewards checking account based on geographic location, APY, or total return (see second screenshot below).

How it Works
finovatestartup_bestinshow_2008The first challenge is getting customers to the site. FirstROI is investing heavily in Google AdWords to get the word out. For example, a search on "checking accounts" at Google today (note 1), displayed CheckingFinder in second place, trailing only BofA (see screenshot below).

As a relative newcomer to AdWords, the company's bid price would have to be high to score the second slot over such big names as Schwab (#3), HSBCdirect (#4), Key Bank (#5), WaMu (#6), Chase (#10) and Wells Fargo (#11). CheckingFinder may very well be paying more than BofA, depending on how Google's ad-positioning algorithm weighs its relevance.

image

Clicking the AdWords link results in a list of banks presorted by closest distance to the IP address used to search Google (see next screenshot). Unfortunately, the closest participating BancVue client, Altra Federal Credit Union, is 1043 miles away
(see note 2).

CheckingFinder from BancVue and FirstROI

You can also sort the results by rate (APY) or plug in an estimated checking account balance and ATM usage and have the results sorted by highest annual return
(see note 3).

After selecting the account you prefer, users land on a page that lays out the offer in more detail and includes a bright green "open now" bar at the bottom of the page and another open button in the webpage bullseye, the upper-right corner. The online account opening process is powered by Andera.

image

Summary
Overall, it's a good "micro" search engine, helping users quickly find the best checking account from the company's client base. The big downside from a consumer perspective is that it's currently limited to just 60 participating BancVue reward-checking clients. It will be more effective if they can get more of their 400+ banks and credit unions on board.

While I think most consumers will understand that they are searching a subset of available checking accounts, I think BancVue should disclose a bit more about its relationship with the financial institutions listed. That fact is touched on in the About Us section, but the FAQs don't address this, nor are there any direct links back to BancVue or FirstROI. 

Notes:

1. Google search conducted from Seattle IP address at 1 PM Pacific time, 17 June 2008.

2. Verity Credit Union, which is about 4 miles from my home, is a BancVue client, but their reward-checking account, Velocity Checking, is currently paying a short-term teaser rate of 6.75% to celebrate its 75th anniversary (APY updated 20 June per Shari's comment). When Verity returns to its normal 5% APY, its account will be available through CheckingFinder. There is also a slightly closer California bank participating, Tri Counties Bank, but it is not marketing to Seattle residents, so I don't see it in my CheckingFinder results page.  

3. Jeffry Pilcher, who recently left Weber Marketing to found his own consultancy, ICONiQ, is also blogging at The Financial Brand. He cautions that the days of differentiating your brand with "reward checking" has passed in many markets.

Comments (3)

MoneyAisle Launches Real-time Deposit Auctions, a Potentially Disruptive Technology

By Jim Bruene on June 9, 2008 5:36 PM | Comments (4)

image If you were to sit down with a blank piece of paper and design the perfect friction-free system for determining deposit rates, your invention would almost certainly include some type of competitive bidding. Over the years we've seen several banks test eBay-style auctions including PNC Bank, WaMu, and most recently Zions Direct. Those incorporated a traditional auction model, with the bank putting a deposit up for auction and selling it to the highest bidding consumer.

The latest entrant into auction-style finance, is MoneyAisle, a deposit marketplace from neoSaej, that launched today. MoneyAisle employs a reverse auction, where the consumer offers to buy an item, in this case a deposit of a certain size, and sellers bid against each other to offer the best price, in this case the highest interest rate.

In theory, MoneyAisle comes closest to the perfect deposit-pricing model. It's right out of the Economics 101 textbook. If they can get enough buyers and sellers to make it work, it could cause a serious disruption in the market for so-called high-yield savings accounts and certificates of deposit (CDs).

I really like the auction model, but there are some obstacles for it to overcome on its way to market dominance. Here are a few that come to mind: 

1. How to convince users that it's in their best interest to take the rate offered at the end of the auction? The first thing I did after seeing the 3.1% offer was to type in www.ingdirect.com and see how it compared. And given that ING was just a bit less, 3.0%, it's hard to get excited about opening a new account with an unknown bank for just 10 more basis points. Or worse yet, type "high yield savings rates" into Google and see five advertisers that can beat the 3.1% (see Google screenshot below).

2. How to make the auction's feel "real?" It seems like a game, which is not necessarily bad. Users choose a deposit product, $ amount, and their state of residence, then spin the dial. Then in real time you watch the results as banks bid against each other for your money (see Step 2 screenshot below). Then after 60 seconds or so, the winner is displayed (see Step 3 screenshot below) and you can proceed to make your deposit, provided you are satisfied with the rate and the bank making the offer. 

3. How to keep one bank from dominating the bidding? If the lowest-cost bank, or the one most skilled at cross-selling, or the one most in need of deposits, consistently bids "above-market" rates, will the remaining banks stay in the game?

4. How do you compete with the offers available via Google AdWords, another type of auction (see below)?

image

How it Works
After registering with a bare minimum of info (username, password, and security question only), it's a simple three-step process that couldn't be easier:

1. Decide whether you want a high-yield savings account or a CD (see step 1, screenshot below)

2. Start the auction (see step 2, screenshot below) and participating banks bid in real time via a preprogrammed, proxy bidding system

3. A few minutes later, accept the winning rate and arrange for account opening with the winning bank (see step 3, screenshot below)

In testing today, 51 banks bid on my high-yield savings account (at just after midnight Pacific Time) and 72 bid on a 1-year CD (at 5 PM Pacific Time). We were offered identical 3.1% APYs for a $5,000 savings account in Washington state and a $50,000 one in New York. When we ran an actual savings-account auction after registering, the winning bidder was Massachusetts-based Beverly National Bank with again, a 3.1% rate (see note 1). A $25,000 1-year CD in Washington earned a top bid of 3.90% by Michigan-based Isabella Bank, similar to the best rate advertised on Google.

MoneyAisle step 1: Choose a deposit product

image


Step 2: Watch as banks go through several rounds of bidding to reach the final rate

image


Step 3: Confirm you want the rate within 30 minutes and complete the rest of the form; the winning bank then contacts the customer to complete the transaction

image

Note:

1. The bank's bid was more than double its published rate for a $20,000 deposit. But Beverly does currently pay 3.0% APY on $100,000 balances. When I reran the auction at 5PM Pacific Time, the bid was 30 basis points higher, 3.4% from Umbrella Bank.

Comments (4)

Tax Prep 2.0: Does H&R Block's Tango Provide a New Model for Pricing Online Financial Services?

By Jim Bruene on April 10, 2008 6:16 PM | Comments (4)

imageFive days from the U.S. income tax deadline, tax prep ads are everywhere. I don't usually notice them because I still file the old-fashioned way, via CPA (note 1) and paper check. However, yesterday I noticed H&R Block's banner strung across the top of TechCrunch (screenshot below).

It caught my eye for a several reasons:

  • 24/7 access to live tax help, a real benefit to the legions of last-minute filers.
  • The "Tango" branding really intrigued me. How could a tax service be interesting enough to have its own brand, especially one as off-beat as Tango (note 2)?

The Tango product, complete with YouTube videos, <wannatango.com> URL, and more, deserves a post of its own, but here I want to focus on Block's pricing/segmentation.

The tax-prep giant divided its online services into two distinct categories, both catering to the computer savvy do-it-yourself crowd. Block calls the segments: "Do it Myself" and "Do it With Me" (screenshot below) with pricing as follows:

Do it myself:

  • $14.95 for 1040EZ
  • $29.95 for 1040 with itemized deductions
  • $59.95 for 1040 with state return

Do it with me:

  • $70 Tango option -- complete online and submit yourself with unlimited 24/7 support (includes state return)
  • $99.95 (+$34.95 for state) complete yourself and then route to an H&R Block agent to review and e-file
  • $99.95 (+$34.95 for state) and above (note 3) to fill out an online questionaire and submit your data to have someone at H&R Block complete the return for you

image

NetBanker strategic action item
Banks, take notice. Block's pricing strategy is brilliant and if applied to online banking, could revive the difficult business case. Online banking, like electronic tax prep, is a mature business, and has long ago proven itself as valuable and convenient.

Now it's time to cash in on that convenience. While levying fees across the board would create customer ill-will, it's possible to segment your online banking base into customers who want plain vanilla services for free and those that want the best, and are willing to pay for it. Block's Tango is a good example of how to price for those who want to go it alone for the lowest cost and those that want high-tech online services AND high-touch tech support.

A bank or credit union could mimic the Block program:

  • Do it myself (FREE): Download data, set up my bills, create triggered alerts, monitor my own security settings, read my own credit report, store my own statements on my hard drive, and so on
  • Do it with me ($5/mo): 24/7 access to an online specialist who will provide advice, assistance, and help doing any of the above. Added bonus: lifetime storage of all transactions, statements, and check images!!!

Call it VIP Banking and start turning online banking into a profit center. With dedicated fee income you will have fewer problems during the looming crisis in online banking measurement

For more on online banking pricing and how to develop a premium-priced online banking service, see our Online Banking Report: Pricing - The "Fee" vs. "Free" Controversy (#109).
 

H&R Block Banner on TechCrunch (9 April 2008, 1 PM Pacific)

H&R Block Tango advertised on TechCrunch

Landing page from TechCrunch banner (9 April 2008)

H&R Block landing page from TechCrunch banner


Tango homepage (9 April 2008)

H&R Block Tango home

Notes:

1. In testing Turbotax and TaxCut, I have found both to be intuitive and surprisingly easy to use, even for relatively complicated returns with business deductions. This year, I did my teen's return on the free TurboTax online site, which was very slick. My son's already deposited his $2 refund into his online bank account.

2. H&R Block's Tango actually has a Wikipedia listing (within the H&R Block entry). That's something you don't see too often. According to Wikipedia, the Tango service first appeared last year for 2006 returns, but was plagued by computer glitches that forced the company to issue refunds. But it received good reviews this year, scoring an 82 here, just two points less than leader TurboTax Online. Tango finished ahead of the other four sites reviewed (here).

3. My federal returns would cost $199.80 through this most expensive option, about $500 less than my CPA.

Comments (4)

BancVue Alters the Checking Value Proposition, Powering High-Yield "Reward" Checking Accounts at 350 FIs

By Jim Bruene on January 9, 2008 2:11 PM | Comments (1)

For someone whose job it is to stay on top of innovations in financial services, I hate to admit I'm late to the party on the so-called "reward checking" phenomena. Last year, I'd noticed a number of smaller financial institutions launching high-yield checking accounts, but I hadn't realized it was a national trend primarily powered by a single bank tech supplier, Austin, Texas-based BancVue (see note 1).

According to a November BankRate article, more than 350 U.S. banks and credit unions now offer so-called "reward checking accounts" powered by BancVue with 30 new ones coming on board each month. These checking accounts usually pay high rates of interest, typically 6%, if users meet high levels of electronic banking activity each month.

Typical requirements to earn the high yield:

  • 10 to 12 debit card transactions each month
  • Electronic statements (no paper)
  • Online banking usage

Typically, the following benefits are paid ONLY when the above requirements are met:

  • 5% to 6% interest on the first $25,000 to $40,000 in balances
  • ATM refunds up to $10 to $15/mo

And most seem to include:

  • No monthly fees regardless of activity or balance levels, so the account can be marketed as "free"

Marketing
Another distinguishing characteristic of these accounts is the innovative marketing and website design. With the help of BancVue, smaller banks and credit unions are able to offer a level of design and pizzazz that meets or exceeds the typical megabank high-budget program.

Here are some of the more interesting BancVue-powered programs we've looked at (screenshots follow):

  • Velocity Checking <velocitychecking.com> from Seattle's Verity Credit Union
    Earn 6.01% on balances up to $40,000 and receive ATM refunds up to $25 when meeting the following monthly requirements:
    - 12 debit transactions
    - 1 online banking login
    - electronic statement in lieu of paper
  • Turbo Checking <turbochecking.com> from New Mexico's Charter Bank
    Earn 6.01% on balances up to $25,000 and ATM refunds when meeting the following monthly requirements:
    - 10 debit transactions
    - receipt of 1 direct payroll deposit or other automated ACH deposit
    - 1 login to online banking
    - electronic statement in lieu of paper

And our favorite, which substitutes iTunes downloads for the high-yield benefit:

  • FreeTunes Checking <freetuneschecking.com> from Oregon Community Credit Union (see note 2)
    Earns 4 free iTunes downloads each month provided the following are met:
    - 12 debit transactions
    - 1 login to online banking
    - electronic statement in lieu of paper

Screenshots

Velocity Checking from Verity Credit Union

Turbo Checking from Charter Bank

FreeTunes Checking from Oregon Community Credit Union

Notes:

1. I began researching this area after reading Verity Credit Union CMO Shari Storm's recent blog post (here) about how she'd changed her payments behavior to make the 12 monthly debits required for its Velocity Checking.

2. Oregon Community Credit Union also offers a high-yield version, Remarkable Checking, that substitutes a 5.05% APY on all checking account balances instead of the free music. Monthly account requirements are the same. 

Comments (1)

Prosper Increases its Loan Fee by 100%

By Jim Bruene on January 7, 2008 9:59 AM | Comments

As noted in our recent research report on the P2P lending market (here), the exchanges need to boost revenues to remain viable. Even with scale, a 1% borrower fee and 1% servicing fee just don't provide enough revenue with the relatively small loan sizes currently being funded.

For example, using Prosper's previous pricing on a typical $7,000 loan, about $130 would be earned in the first year, then another $50 for the remaining two years of the loan (see note 1), for a maximum of $230 in lifetime revenues per loan.

So until loan sizes increase dramatically as secured notes become more common, Prosper has raised its prices for the core portion of its loan demand, the alt-prime and subprime portion. The company left its superprime, class AA price alone because it competes with banks and credit unions for this type of borrower.  

As you can see from the table below, most loan-origination fees increased by 1 point, although C and D loans were increased 2 points. Looking at the company's mix of business during the first half of 2007, the new pricing would have doubled its loan-origination revenue from about $500,000 to just over $1 million. The weighted average fee under the prior pricing was 1.2%, compared to 2.4% under the new formula.

Here's the new price plan effective Jan 4, 2008, as announced in the Prosper blog (here):

Type   New Price   Previous  Change  Avg Loan*  Avg Loan Fee* 
Prime  
  AA           1%               1%             none             $9,000            $90
  A             2%               1%            +1 point         $10,300         $210
Near Prime
  B             2%                1%           +1 point         $9,800          $200
  C             3%                1%           +2 points       $8,400           $250
  D             3%                1%           +2 points       $6,500           $195
Sub-prime
  E             3%                2%            +1 point        $4,500          $135
  HR           3%                2%            +1 point        $3,000           $90

Weighted
  Average*** 2.4%          1.2%

*Average loan size during the first half of 2007 per company
**Loan-origination fee deducted from proceeds of loan; there is no fee if the loan does not get funded
***Using the loan mix from the first half of 2007

Note:
1. It depends how the servicing fee is calculated. At Prosper, it's calculated on the outstanding loan balance which for a $7,000 loan averages approximately $6,000 in year 1, $3,750 in year 2 and $1,250 in year 3.

Comments

Mobile Access May Be New Anchor for Fee-Based Premium Online Banking

By Jim Bruene on November 22, 2006 5:43 PM | Comments

What's the biggest obstacle to online banking innovation in the United States? No, it's not security, ease of use, or customer education. The biggest problem is lack of fee income.

Unfortunately, online banking came of age in a golden time for U.S. financial institutions, with rate spreads at historical highs, customer loyalty at a peak, and fee income on the rise.

Banks, flush with profits in most business lines, decided not to bother with the difficult task of wringing fee income out of the new channel. So we ended up with near-universal adoption of the FREE model despite little economic justification for the subsidy. Sure, online banking customers are more profitable, but so are safe deposit customers. And you don't offer those free across the board.

The results are predictable. With online banking being cash-flow negative, many management teams have under invested in the online channel, while subsequently over investing in branches (see Online Banking Report #128, The Demise of the Branch). 

Fighting free
There is no way to eliminate free online banking altogether, but you can nip away at the edges, convincing some customers to voluntarily pay fees for value-added services. 

One promising avenue is converting users into a premium, fee-based online banking option, the same way American Express convinces its members to increase their annual membership fee two-fold by trading up to a Gold Card.

But in order to convince customers to voluntarily give up their free service, the fee-based version must have compelling benefits. The following three hot areas could be used to anchor a platinum online banking service. The first two we've looked at before (see previous coverage here), but mobile banking is the newcomer that offers much promise:

  1. Unlimited storage: Taking a cue from Google's Gmail that offers virtually unlimited email storage, banks should allow their gold-account customers to permanently archive e-statements, transactions, and images for no additional charge. Everyone else sees their transactions disappear after a few months. And every month, right before erasing another month of data, provide customers with an opportunity to upgrade to premium banking (see Online Banking Report #118, Lifetime Statement Archives).
  2. Unlimited credit report access: The second most powerful premium benefit is simple online access to credit reports directly from within the logged-in online banking area. Users could assess their previously downloaded report at any time, and order a new one several times per year. In addition, customers would be protected by daily credit bureau account monitoring (see Online Banking Report #83/84, Credit Report Monitoring & Identity Protection).
  3. Full interactive mobile access: While the previous two items are relatively easy to do today, in the United States, the mobile market is just revving up with Cingular's recent announcement to add a banking application to its mobile "desktop." We've seen a live demo using a real bank account, and it's impressive. The partners on the service are Firethorn and Checkfree (see upcoming Online Banking Report #138, due out in late January 2007).

Any premium online banking program should include one or more of these three core, value-added services. Then, additional minor services, such as security alerts, can be layered on to further differentiate premium banking from plain-old banking (POB).

For more information about online banking pricing and premium service offerings, see Online Banking Report #109, Pricing

Comments

Fee Income Opportunities from SMS Alerts

By Jim Bruene on July 14, 2006 10:24 AM | Comments

Ebay_logo_1While most banks in the world charge fees for at least some aspect of online banking, the service has been almost entirely fee free in the United States, at least ever since Bank of America rolled out free bill payment in 2002.

At first glance, it seems like a great deal for consumers; however, the lack of direct revenue has hampered investment in the channel and deprived U.S. customers from the more sophisticated services common throughout the world, such as SMS alerts, multi-factor log-in controls, and so on.

Ebay_sms_alert_mainWe're always on the lookout for fee-based opportunities (see Online Banking Report 122/123 for a laundry list of online fee opportunities), and we are encouraged by eBay's latest innovation, SMS auction alerts with a fee of $0.25 per auction. This is the first time eBay has attempted to charge fees to bidders. The site has offered free email alerts since the beginning.   

Here's how SMS alerts work (see screenshot below):

  1. Ebay_sms_alert Select "Get SMS alert" (see red circle in screenshot at above, click to enlarge).
  2. Select mobile phone provider from drop-down list and enter mobile phone number; currently Cingular, Verizon, Nextel, Alltel, Sprint, and TCRcom participate
  3. Check "Watched item ending alert" or "Outbid alert"
  4. Click "Continue" which initiates a confirmation message to the user's mobile phone
  5. Send a text-message reply from the mobile back to eBay to agree to the charges

SMS-alert users pay $0.25 for each auction entitling them to up to 10 alerts. Each 10 thereafter cost another $0.25. It would be unusual for the number of alerts to exceed 10. After receiving an alert, users can submit a new bid via text message by responding to the text message with their new bid amount. Bidding can be protected with an optional PIN.

Instant messaging alerts work in a similar manner (click on screenshot for closeup):

  1. Ebay_im_alert_main_1 Select "Get IM alert" 
  2. Select IM provider; eBay supports the big three: Yahoo, AOL, MSN
  3. Check "Watched item-ending alert" or "Outbid alert"

There are no fees for IM alerts. After receiving an IM alert, users can submit a new bid via the provided link.

In addition to SMS-alert links in the main auction listings, successful bidders are also prompted to set up an alert on the bidder's confirmation screen (see below).

Ebay_sms_alerts

What it means for financial institutions
There is no reason why banks cannot charge for triggered alerts. Unlike account access, alerts are a value-added service with no sQwest_premium_menuimilar "free counterpart" in the offline world. You don't see telecom giants giving away any of their specialized services such as caller-id, custom ringing, call forwarding and so on. Banks should work on developing premium service bundles. For inspiration, take a look at your local phone provider's website (see Qwest screenshot right).

Resources:

Comments

Provident Bank Launches Premium Option

By Jim Bruene on October 3, 2005 3:07 PM | Comments

Provbank_premium_featuresBaltimore-based Provident Bank <provbank.com> with $4 billion on deposit from 590,000 accounts, is the largest U.S. bank to segment its online banking access into two levels, My Account Online and Premium Internet Banking with Bill Payment.

As the name suggests, the primary difference is bill payment. But also the premium version provides a combined statement whereas the basic version still requires separate logins for
each product. Premium also allows downloading into Quicken/Money (click on inset for an account comparison).

Basic online banking is free; premium is priced at $5.95/month, a popular price point in the days before bill payment became free. The bank encourages trial of the premium service with a generous 6-month fee-free period.

Analysis
It’s a good start, but it would be more effective if the premium version had more benefits such as extra service, more security, longer archives, and so on. The bank also needs to support the product better with website graphics, copywriting, and imagery that reinforces the premium image.

Reference: See OBR 109, for a report on online banking segmentation.

--JB

Comments

Premium Banking Examples

By Jim Bruene on April 15, 2005 12:19 AM | Comments

1st_source_premium_bankingFor years, whenever we needed to show an example of product line segmentation, we've used 1st Source Bank's Premium Online Banking, a $6/mo upgrade for users if its free online banking service.

Our most recent research uncovered several more examples:

American Savings Bank
Free: Online Banking
Free: Online Banking Plus
$5.85/mo: Online Banking Premium

North Shore Bank
Free: Epay
$5.95/mo: All Pay

We'll be covering this subject in great detail as numerous premium online banking programs are launched during the next few years. For more information on multi-level pricing, refer to Online Banking Report #109, published in August 2004.

--JB

Comments

The “Fee vs. Free” Controversy

By Jim Bruene on August 1, 2004 12:48 PM | Comments

Free bill payment. It seems inevitable. With Bank of America and other U.S. mega-banks flogging free bill payment 24/7 , is it possible to still charge a fee and remain competitive?

We believe you can and should charge bill payment fees to at least a portion of your online banking base. But you need to expand the list of features and benefits for the fee-based option to distinguish it from free services offered by other banks.

Eventually, you will likely divide your online banking base into two or more segments. The FREE entry-level service receives the usual laundry list of online banking benefits. The premium level qualifies for an even longer list of benefits, most notably, pay-anyone bill payment. However, premium customers pay monthly fees ranging from $5 to $10 or annual fees in the $50 to $100 range

The key to making this work is to get away from calling the monthly charge a “bill payment fee.” That doesn’t stack up well with BofA and other major banks. Instead, position the premium service as something with MORE VALUE for online-savvy households. Make sure there are easily discernable differences between basic and premium, other than bill payment, for example more extensive archives or more security options. 

04-aug-a1.jpg

If you are going to give up $60/yr in fee income, make sure you let visitors know. HSBC has two banners on its Personal Internet Banking page.

 

 

If you do find it necessary to match the big banks with a free pay-anyone offering, we recommend the Wells Fargo approach. Dole out free bill payment judiciously, as an incentive to encourage customers to increase balances, adopt e-statements, or add an overdraft line of credit. 

 

-- Jim Bruene, Editor & Founder
jim@netbanker.com

Comments
Categories: Pricing

Pricing Strategies to Rapidly Approach Zero

By Jim Bruene on February 5, 1999 12:57 PM | Comments


1999-Feb-Article4-1.jpg

Many financial institutions use a quasi-breakeven model for bill pay, charging $4-6 per month to cover outsourced payment processing costs. It’s a good strategy, provided your competitors do the same. Don’t count on it. We expect the “street price” of bill payment to rapidly approach zero as aggressive non-banks enter the fold.


 

Fee-Based Programs

Service fees for “plain vanilla” consumer programs top out at about $6/month. But, a value-added service offering may be able to command higher fees, especially from small businesses and individuals with more complicated finances. You can also sell optional ancillary services integrated with bill payment (see OBR 11/97 ).

1.

Flat Monthly Fees

Description: It’s not particularly difficult to justify a small monthly fee, like $3 per month or less. In the U.S., consumers save $0.33 in postage for each bill paid electronically. Research shows that the mean number of bills paid by computer/modem-owning households was 11.3 (OBR 10/96 ). If all are paid electronically, that’s an easy $3.73/month in postage savings. But, 37% of those surveyed paid fewer than nine bills per month. Their postage savings would be $2.97 per month or less.

Bank Goals: Cover costs; provide all-you-can eat service to encourage usage.

2.

Transaction Fees Only

Description: Use the ATM pricing model and charge for bill payments by the transaction. This approach is not widely used, primarily because many bill pay service providers charge a significant flat monthly fee per registered user, regardless of bill payment volume.

Bank Goals: Cover variable costs; encourage trial; compares favorably with known postage costs.

3.

Monthly Fee Plus
Transaction Charges

Description: A common approach, a monthly fee that covers a set number of payments each month, with a transaction charge for “excess” transactions.

Typically, the monthly fee cover the first 15 to 25 payments. Thereafter, each additional payment costs $0.40 to $0.50 each. Since 88% of PC/modem owners pay 16 of fewer bills per month (OBR 10/96 ), most consumers pay just the monthly fee, never incurring transaction fees. But business users end up paying a variable fee based on usage.

Another variation on this theme, which we’ve only seen a few times, is to charge a very low monthly fee that covers just a handful of payments. For example, $2/month for the first five transaction, then $0.50 each thereafter. This approach would satisfy casual users paying 2-3 bills, while charging heavy users a fee commensurate with the value.

Bank Goals: Cover costs; encourage light users; charge heavy users.


 

4.

Dollar Volume-Based Fees

Description: Although not used by anyone at this time, another possible approach is to base bill pay fees on the total dollar value of the payments rather than the number. The theory here is that those paying higher dollar amounts would be less price sensitive. For example:

1999-Feb-Article4-2.jpg

We think this approach would make sense to users, especially when combined with payment guarantees and/or payment insurance programs (e.g., monthly payments guaranteed in the event of death or disability).

Bank Goals: Match bill pay fees more closely with value received, e.g. higher fees for higher levels of household income/expense.

5.

Annual Fees

Description: Instead of a pesky monthly fees assessed 12 times per year, an annual bill payment membership fee might be more palatable; especially if combined with value-added services such as e-mail confirmations and bill payment credit lines (OBR 11/97 ).

Bank Goals: Cover fixed costs while reducing the number of times fees are assessed.


 

7.

Premium Pricing for Small Businesses

Description: Take a cue from the phone companies, differentiate your business bill pay
with several value-added features, such as integrated email messaging, and then charge 3 to 4 times the consumer price. As we discussed in our Sep. ‘98 Small Business issue, business users might pay as much as $250/month for Virtual Bookkeeping services (OBR 9/98,).

Bank Goals: Profitable fee revenue; new business generation; incremental loan outstandings; cross sales.

Bundling Strategies

7.

Bundled with Loans

Description: Pay-anyone bill payment with bundled bill payment overdraft line of credit and/or credit card.

Example Pricing:

  • $15 to $50 annual fee for a bill payment and credit line bundle covering the first 15 payments per month
  • $0.50 charge per payment after the first 15 each month
  • 16.9% APR on bill payments charged to the credit line, with a three day interest-free grace period
Bank Goals: Increase loan balances and collect fees from heavy users.

8.

Bundled with Online Checking

Description: Pay-anyone bill payment bundled with special “online” checking accounts that have monthly fees or balance requirements higher than they would without the bill pay feature.

Bank Goals: Increase traffic at Web site for cross sales; partially cover costs; improve customer retention.

Other Strategies

9.

Free, Free, Free

Description: To use the latest Web terminology, become a free “portal” to users’ bills. Then layer transactive services on top of basic bill payment, such as email payment alerts and confirmations, user-defined reminders, checking account balance alerts,
e-mail confirmations of high-dollar DDA transactions, and so on.

Bank Goals: New customer acquisition; increase Web traffic; PR; build positive brand image online.

10.

Compensating Balances

Description: Many banks routinely waive monthly checking account service charges if the customer maintains a given balance level. Since customers are conditioned to this pricing for checking, it may make sense to follow the same strategy with bill payment. Wells Fargo and numerous major banks use this approach.

Bank Goals: Cover costs either through fees or higher balance levels; can be positioned as a “free” service provided minimum balance is maintained.

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