Pub. 3 2014 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 22 T HE VIABILITY OF FREE CHECKING HAS been a topic of conversation across the industry for quite some time. Unfortunately for most community banks, little has been done to effect significant change regarding what has been an outdated strategy for quite some time. Free checking has traditionally been subsidized in large part by overdraft fees – something Strunk knows quite a bit about! – as well as debit card interchange revenue. But a lot has changed, as we all know, over the past few years. In short, overdraft revenue and debit card interchange has dropped dramatically due to regulatory and legislative changes since 2010. Worse yet, the historic decline in interest rates since late 2008 have negatively impacted the value of deposits – a problem that has only been compounded by lower loan demand. The chart below shows this impact on fee income over the past 6 years. Since 2007, deposit fee income across the community banking industry (excluding banks larger than $25 billion in assets and specialty banks) as a percentage of average assets has declined from 0.34% to 0.26% last year – a whopping 24% reduction! To put this fall off in terms of dollars, communi- ty bank fees on deposit accounts have dropped by over $1.5 billion over this period. Something clearly has to be done to reverse this trend – something fundamental in terms of how we manage our business. Community Bank Fee Income/Average Assets When we look at the impact the decline in fee income has on DDA profitability – coupled with the impact caused by low interest rates and rising costs – the picture becomes even more severe. What’s happened since the early ‘90s when “free checking” was first introduced? A radical transformation in the retail banking business has happened. In the early ‘90s we didn’t have services like online banking, automated bill pay, or mo- bile banking. Not only have these solutions provided improved service and convenience to consumers, they have also added substantial cost for bank DDA products. Most institutions have not historically charged consumers for any of these add on solutions – the cost base for a DDA product has gone up with STRUNK’S VALUE CHECKING STRATEGY WILL GENERATE FEE INCOME FOR YOUR BANK By Mike Sobba, President Strunk LP 0.35% 0.28% 0.21% 0.14% 0.07% 0% 2007 2008 2009 2010 2011 2012