Checking
Have banks gone crazy? First, there was free retail
checking, and now all over the country, banks are marketing free checking for small-business customers. Not every institution is convinced that it’s a good idea, but many that have tried it claim that it has given them a competitive edge.
Free-For-All
I
f you’re still on the fence about whether to offer free small-business checking, read this: Experts say it’s no longer a matter of “if” but “when” you should offer this product. The case in favor of free small-business checking is compelling, and it keeps getting stronger. In one recent example, free checking tops the list of what’s considered “very important” to people looking for a new bank, according to a survey released in January 2005 by Keynote Systems. In the Keynote Customer Experience Rankings for the Online Banking Industry, consumers said they consider free checking (68 percent) and fee and service charges (67 percent) more important than online banking functionality (56 percent) or even the physical location of bank branches (45 percent). Yet bankers historically have resisted the idea that free products can be good, notes David Furnace, managing director of Sheshunoff Management Service’s Revenue Enhancement Division, headquartered in Austin, Texas. Take a look at the growth of free retail checking. While some very progressive banks started offering free retail checking as long as 25 years ago, only in the last five to seven years have others caught on to the benefits. The general feeling was that free checking might bring in the wrong sort of client, that is, the low-balance, unprofitable type. The reality was quite different. Furnace explains that recent data shows an average free retail client generates over $200 in fee income per account per year. In addition, they generate approximately $50 to $80 worth of spread income. The incremental front and back office costs on a checking account range
Commercial Custome r s
by Janet Bigham Bernstal
between $50 and $60, and the cost of acquisition is somewhere between $30 and $80. “The typical free retail account generates more fee income than the average non-free account and the average balance across the client base was $1,200,” claims Furnace. “It turns out that what everyone was fearful of, actually provided a little more revenue with a decent balance.” Not surprisingly, free retail accounts gained in popularity and can now be found in most markets. Within the past two or three years, bankers began
With offers such as free checking and convenient hours, the bank hopes to build relationships, which will lead to selling other products and services.
to express the same skepticism about the idea of free small-business checking initiatives that they once expressed about free retail checking. Once again, the numbers made sense. While activity in small-business accounts closely mirrored retail accounts, the net marginal contribution in the average small-business account is close to $500, versus $200 dollars for free retail. “The economics on small business are actually better [than retail] because there’s a lot more margin, and the fee
(continued on page 17)
Illustration by www.artville.com
ABA BANK MARKETING MARCH 2005 15
Selling the Free Small-Business Checking Account
T
hese days, offering a free small-business checking is “simply the ticket to compete,” says David Furnace, managing director of Sheshunoff Management Service’s Revenue Enhancement Division, headquartered in Austin, Texas. “Seven years ago, the product alone was competitive advantage,” he says. “Not today, now you have to out-compete.” To do “free” right, he says, means executing the program correctly on all fronts: sales, marketing, merchandising and the account-opening process. “Getting to those small-business customers is more difficult and expensive than the typical blanket direct mail for retail,” he explains. “You must be more focused, more targeted and that means spending more money.” Also, it’s not the goal of an effective free checking marketing campaign to get people David Furnace to change banks. Short of hypnosis, you’re unlikely to move the public in a direction they weren’t previously headed. So why are you advertising? “It’s to get them to pick you once they’ve already decided to change banks,” says Furnace. Study after study has shown that the primary reason customers move out is that they’re unhappy with their current financial services institution. “About 68 percent of customers switch because they’re upset,” says George Monnier, senior vice president of ACTON Financial Services Group in Lincoln, Neb. “Others move, change jobs or get divorced. It averages that one out of four will change banks this year.” To target the right person, the company’s method is to look at a number of factors, namely, who is actually opening the accounts and where they’re located. From a retail standpoint, people open a transactional account for convenience. By analyzing the bank’s footprint, the company can determine what the potential market is for geographic convenience for free checking. Then the company looks at who’s opening those accounts. It finds the majority of free retail accounts are opened by females. In analyzing the small-business owner, those with under $10 million in sales, they know that nearly three-fourths of those have an office in the home. He also notes that nationally, more than 50 percent of small businesses are owned by women, and they’re the fastest growing market segment. With these premises in mind, Monnier says that the company has a marketing strategy with multiple tactics that captures 50 to 75 percent of the people in transition within that
bank’s branches convenience footprint. Monnier describes their three-pronged approach: One: One panel in a detailed four- to six-page free retail checking direct mail piece that also talks about free commercial checking. That way you get two messages into one household at no extra cost. “We do full saturation mailing on the geographical footprint because we also know the small-business owner lives in the same household. Since the lion share of checking accounts is influenced by women, that direct mail piece needs to correspond with how they think.” Two: An officer call program. These are the programs he calls the Tell-a-Friend on the retail side and Refer-MyCustomer in business. Current customers get a free gift for referring family, friends or co-workers. “Now you have business owners pushing the bank to their customers or employees. It also allows you a dialog with the business every six weeks when you put change displays.” Three: Have a separate direct mail piece tied strictly to smallbusiness free checking. The mailing dates for those pieces are also carefully chosen. “Most people switch [retail accounts] when they have a paycheck in their hand and there are peak pay periods,” says Monnier. “The mailings coincide with those dates because we try to get them to walk into our bank first with an offer of free checking and a free gift.” Business owners have bill pay and payroll patterns similar to retail, so their pieces are mailed at the same time. Derek Martin, senior vice president of product management for the Bank of Oklahoma in Tulsa, says they use “option one,” sending a direct mail piece with a small-business panel to retail households every six to eight weeks. “We believe that this is the target market as opposed to sending direct targeted mail to small business,” he explains. “If you think of a traditional small-business front office, there’s someone deciding what’s junk mail and not giving it to the principal decision maker.” Their efforts to sell free small-business checking have been paying off. For one thing, Martin says it cleared the last hurdle clients had for not doing business with them. “We’ve had success,” he states. “We’ve opened more small-business checking accounts and sold more business check cards. Also, retention has been extremely solid.” ■
16 MARCH 2005 ABA BANK MARKETING
(continued from page 15)
income they throw off is greater,” explains Furnace. “So when banks ask: ‘Does it make sense to offer free smallbusiness products?’—our firm says, yes, in a heartbeat.” Those that do a good job of executing a free small-business checking initiative can double or triple the number of accounts they open, says Furnace.” We’re not talking about 10 percent, but dramatic improvements.” Early adopters BankAtlantic FSB (assets: $4.6 billion), Fort Lauderdale, Fla., knows about dramatic. The bank was one of the first in Florida to launch free retail checking in 2001, followed closely by free business checking in 2002. Chief Marketing Officer Jarett Levan points to the extraordinary rise in overall lowcost deposits as evidence of its success. “We don’t report product by product categories, but in 2001 our overall low-cost deposits for retail and busi-
“These are all expensive strategies, we recognize that,” says Levan. “We’ve announced that we spend about $15 million a year on our Florida’s Most Convenient Bank initiatives, but these are important conveniences for the customer and it differentiates us from the competition.” BankNorth Group Mark Collins calls free small-business checking “Simple to sell, easy to buy.” The executive vice president
of sales strategies and small business for BankNorth Group, Portland, Maine (assets: $28 billion) says the holding company is number one in market share in Maine and Vermont, and two in Massachusetts thanks to the initiative launched in March of 2004. “We’d like to think we own small business in a lot of our markets and free business checking has been a very important part of that, “ explains Collins, based in Portsmouth, N.H. “The number
Bankers historically have resisted the idea that free products can be good.
ness, including checking and savings, were 17,000,” he explains. “This year we’re on target to open about 179,000 accounts and these are all from the same branches we had in 2001.” BankAtlantic’s free checking accounts are totally free, with no footnotes or hidden charges. In addition to unlimited transactions and no minimum balance, there is a free gift and a Tell-a-Friend program where customers receive a gift when friends they referred sign up. In January, the bank expanded its offers to include free online bill pay and midnight banking in five of its branches. Levan admits that there were concerns of loss of fee income, especially for shareholders. But he points out that BankAtlantic’s mission always has been to offer differentiated products and services for the customer. With offers such as free checking and convenient hours, the bank hopes to build relationships, which will lead to selling other products and services.
ABA BANK MARKETING MARCH 2005 17
F rst
for small business banking with big business privileges.
Samples of advertising material from the free small-business checking offered by First National Bank Corp., Hermitage, Pa.
FREE Small Business Checking
Because we’re in your community, your success becomes our success. To see how we put the special needs of your small business first, bike on over to your nearby First National Bank. Prefer driving your car? We’ve got parking for that, too!
• No Monthly Service Charges • No-Fee Business Debit Card • Free Internet Banking & Bill Pay • Check Safekeeping • Intro Check Package Discount • Business OverdraftHonor™
Visit a First National Bank Personal Banker, call 1-800-555-5455 or go online at www.fnb-online.com.
More than 130 locations covering We s t e rn Pennsylvania and Northeast Ohio.
Banking
MEMBER FDIC
Investments
Insurance
Home of the Personal Bankers®
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of new accounts brought in because of this product is significant. It’s been a very good financial investment.” Collins credits the success to the alignment between sales and training and a disciplined marketing approach in BankNorth’s Small Business Foundations program. He says free business checking is a great sales tool and door opener for the sales force. As part of the preparation to launch the new product, BankNorth changed its selling system across all six states, relying heavily on training and role-play. “We have 380 people out selling on a daily basis, making 80,000 sales calls in a year,” he explains. “We’d like to make sure that all the sales calls are very similar and cover certain points.” Late entrant Chris Divine said her bank had been holding out on offering free smallbusiness checking because managers
18 MARCH 2005 ABA BANK MARKETING
were concerned about possible loss of fee income. “A year and a half ago we determined we’d lose more than we’d gain by offering free small-business checking,” says Divine, senior vice president and director of marketing at F.N.B. Corp., a diversified financial services company headquartered in Hermitage, Pa. “But over the last year we watched accounts in the business section stagnate while at the same time our competitors all had entered the market with the free product.” Bank branches are based in what Divine calls an industrial belt of western Pennsylvania and Northeastern Ohio. It’s a slow-growth market with little business movement. But the few new businesses coming in went right to the competitors with free small-business checking. “We decided that because we weren’t offering the free product, we weren’t
While some very progressive banks started offering free retail checking as long as 25 years ago, only in the last five to seven years have others caught on to the benefits.
even getting the chance to talk to new business,” she explains. “The other banks were getting the first calls.” The bank started to offer the free business product in November 2004, and added just under 800 new accounts
Within the past two or three years, bankers began to express the same skepticism about the idea of free small-business checking that they once did about free retail checking.
signage and an ad in a local business journal. By January of 2005, the bank had started an aggressive campaign of signage, advertising and branch goals. “I think free small-business checking was something we needed to do, and we did it,” sums up Divine. The bank also introduced free retail checking at the same time and Divine thinks the dual product offers “will position us well for this year.” The case for ‘no’ Not every bank can make a strong case in favor of free checking, however. With no branches, Ann Arbor Commerce Bank lives its slogan “Small bank, bigger services.” That means satisfying the “core customer,” the one with multiple relationships with the bank. “We’ve avoided free anything,” says Richard Dorner, president and CEO of the of the Ann Arbor Michigan-based community bank with $340 million in assets. “It’s not so much the fees as it is the marketing opportunity to reward the relationship. If we give everything away, what do we have to offer our core customer?” The discussion of offering free checking does come up in meetings, and as Dorner says, they’re probably not done with it. But “while marketing has the most trouble with it for the reasons mentioned, I expected that. Surprisingly, though, everyone was against it.” ■
within the first two months. As of this writing, Divine hadn’t been able to do the analysis of brand new accounts versus in-house crossovers, but did feel the addition of free checking was extremely positive. “We know that we were losing accounts consistently all year before this product,and we’ve now stopped the runoff,” she says. The account balances were a little lower than expected. Hoping for an average $8,000 account balance, the initial accounts came in about $5,300. But Divine hopes that’s because of the newness of the product. The fee income seems to have a dropped a bit, but it was too early to tell. And they’ve added overdraft privilege on these accounts, so there’s a possibility of an increase in overdraft income as time passes. There was little advertising for the November launch, just some branch
Janet Bigham Bernstel specializes in writing about marketing and financial services industry issues. She works in Jupiter, Fla.
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ABA BANK MARKETING MARCH 2005 19