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5 minute read

Banking Fees – It’s Hard to Understand What’s Really Happening

Jul 28, 2020

Written by: Scott Hamilton

Not too long ago, banks were concentrating on how to charge and keep more – more of the fees customers pay to use an account or as a penalty for not holding up their end of the deal.

My, how times have changed in the fees landscape. Between growing regulatory pressure and the unprecedented pandemic economy, banks are looking closely at whether they have buttoned-up fee processes for consistently, accurately and fairly charging customers. Those fees range from periodic account maintenance fees, which might include annual fees, to usage and penalty fees, which apply in cases such as when customers use another bank’s ATM, send a wire transfer, overdraw their account or miss a payment deadline.

While this might seem like a simple type of review, banks often struggle with two critical challenges in assessing their fee environment. To start, products (and their dozens of sub-variations) are designed by owners, who establish account conditions, including fee schedules; then ask technologists to set up bank systems for ongoing service; then ask marketing, sales and service associates to educate customers. Intent can become fuzzy in the handoff, leading to errors and poor customer experience. Second, a little further down the road, even if systems are charging fees correctly, a bank’s front-line phone agents and tellers don’t always have clear guardrails on how – not to mention when and to what extent – to waive fees. The result isn’t always a well-managed organization trusted by customers, regulators and other stakeholders.

While this isn’t a new problem, capturing designated fees has become an essential lifeblood in today’s economy. Interest margins are shrinking, and many customers, losing jobs due to the coronavirus pandemic, are stretching limited dollars to pay rent and put food on the table, which means credit payments may be missed. This is where our Fee Realization and Compliance Assessment comes in – a new Spinnaker offering that taps into our strengths in analytics, regulatory compliance and program delivery. Leveraging our deep real-world experience across the fee value chain, we help banks significantly improve their confidence in the process and their transparency into what revenue can be fairly expected.

Breadth of the Problem

Fee revenue constitutes a big business subset within the banking industry. As a consequence, besides capturing the eyes of banking oversight agencies, even the smallest inaccuracy or inconsistency in applying and collecting fees can mean a bank is missing out on significant dollars or violating critical regulatory expectations.

A large institution with $100 billion in deposits generates about $300 million in fees annually, based on Spinnaker’s market research. Our analysis further reveals that banks – through clearer communications, more accurate systems design, and more definitive waiver policies and monitoring – often have room for a 2% to 3% gain, which would translate into a potential annual benefit of $10 million for top-tier banks.

Our client experiences underscore the fact that, when banks focus the bulk of their energies on new products and channels, they can often overlook proper validation and controls to ensure their federated and dispersed fee process is clearly and consistently executed to generate revenue that aligns highly with what is expected by P&L and Compliance leaders.

Brought together, this is a risk hotspot of internal awareness, external compliance and lost profitability. In practice, that makes it a problem requiring attention from the product, marketing, operations and risk teams.

Why It Matters Now

Lending money is the primary avenue for how banks earn money, but interest rates are at historical lows in today’s economy. In a traditional marketplace, banks might have had a 2% to 3% profit margin on a loan. Right now, consumers can get a mortgage or automobile loan for 3%.

Those loans are fueled by incoming deposits, which help banks determine what rate they can charge for lending out that money. But they also need to consider how much it costs to service accounts, leaving an interest margin of the difference between the cost of paying customers to use their deposits and what they can charge other customers to borrow money. Within the banking industry, that interest margin is so low right now that banks are facing their lowest levels of profitability – and might even be struggling to remain profitable.

At the same time, banks are bracing for an uptick in losses due to the coronavirus pandemic and its resulting recession. People across the country are out of work, meaning they could soon be missing payments – even for those really-low-interest house or car loans. For some more context, consider that among banks with at least $1 billion in deposits, overdraft fees generated $11 billion last year, prompting scrutiny among regulators about customer gouging. Regulators are going to be watching even more closely for compliance in the fee environment.

Bringing Clarity to Banking Fees

When customers open an account, banks must provide fee disclosure schedules, according to Federal Deposit Insurance Corporation requirements. In that precise moment, things can start to go off the rails. Even if we know that consumers rarely read the fine print, what’s on that official documentation must be the gold standard for applying and enforcing fees.

We’ve seen, however, that disparity in day-to-day practices across the process has helped spark a regulatory environment that is hypersensitive to making sure fees are being charged fairly and consistently across the customer base. Variations in customer experience create the potential for discrimination or abuse. And with the ongoing pandemic, regulators also are urging banks to waive even more fees.

Without question, what a bank states in its account terms and conditions (T&Cs) must be exactly what it does. Responses to COVID-19 have resulted in urgent policy edits and updates to manage consumer needs, adding more complexity to fee processes that were already muddy. Banks must do what they say they’re going to do – which becomes the foundation for serving every customer consistently and fairly. In many cases, banks aren’t doing either perfectly, further fueling regulators’ hot buttons.

Too often, banks don’t take the time to regularly examine their end-to-end practices, leaving quality issues in operations or gaps in service. Perhaps a customer set up bill pay to be one day too late, meaning that a bank is simply collecting $35 every single month and giggling in the corner. Even if a bank is operating within its fee terms, these kinds of situations can escalate quickly into abusive practices.

And if a bank has a waiver policy – which it definitely should have – it should adhere to that waiver policy. The intent is simple, but the execution is complicated because tellers and phone agents are making those judgments. A policy can’t be so prescriptive that an employee must simply follow the rules and can’t act with empathy. However, without parameters for making those decisions, can a bank confidently say that its front-line people are acting free of any bias?

Monitoring who is waiving fees, and at what frequency, allows banks to collect critical data for comparing and identifying associates who are authorizing waivers at multiple times the average rate, as well as those who never waive a fee. That analysis should also integrate customer complaints to help identify trends and problem areas. Besides giving greater transparency to bank leaders that customers are getting what they bought, banks can use this data to manage performance and drive all associates toward desired behaviors that ensure the end goal of consistent and fair service.

Spinnaker Offers a Differentiated Approach

With deep experience in the fee-value chain, Spinnaker’s team can assess a bank’s fee environment for a single product in less than 30 days. Our hands-on experience in running each of these fee processes and practices in production differentiates our approach, because we know where things can (and do) break down. Our integrated solution addresses:

  • Risk and Compliance: We assess how a product and its fee structure are set up. We look at every procedure and programming to ensure proper controls are in place, and we validate that every process step aligns with intent.
  • Process Reengineering: We identify opportunities to improve the overall process. We study how steps are working and if they are stable, while also identifying ways to make them stronger and more efficient.
  • Analytics: We look at what data across the fee process is telling us and how the process is being executed. We drill down to get unprecedented insights on waiver activity, fee frequency and more, then build a data-driven monitoring capability to track performance over time.
Because fee processes are complex and owned by multiple groups, Spinnaker addresses issues with an integrated team that positions banks to improve their customer experience and their bottom line. In less than a month’s time, we assess your process for compliance, recommend ways to improve performance and leverage analytics for ongoing opportunities. Click here to find a plan that will help you gain greater transparency into your fee process and address one of banking’s biggest regulatory risks.