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Why BoA’s Fee Increase Bodes Well for Mobile Payments

Why BoA’s Fee Increase Bodes Well for Mobile Payments

“Where one door shuts another opens.”

As everyone in the universe is aware by now, Bank of America just announced a new $5 per month fee on all of their checking account holders. And while the public relations backlash has been damaging and unrelenting, there is a hidden opportunity for BoA and the other big banks.

The Durbin amendment to the recent financial reform legislation capped the fees that banks could charge merchants per swipe of a card.  The result was a 45% decrease in those fees, theoretically meaning cheaper goods for consumers. Yes and no.  As anyone who’s taken high school economics realizes, the Banks are not going to be happy about having $7+ billion in revenue taken away from them by government fiat. More to the point, they’re going to want to make it up somehow.  As economist David Evans points out:

This is known in economics as a “waterbed effect.” If you sit on a waterbed, all the water beneath you just goes to the other side. Well, the same is true for products that are getting revenues from two groups of consumers to support the costs of the product. If you lower the revenue that one group is contributing, the revenue the other group has to contribute goes up.  With debit cards, when merchants pay a lower price because of a price cap, the banks have to make consumers pay a higher price.

Lo, and behold: checking accounts now cost $5 a month.

But is it really a smart idea to jack up fees that didn’t even exist before? Is there really no other way to create additional revenue? Is innovation dead in the financial sector?

No.  In fact, innovation may be entering a Golden Age for the financial sector. It already has been in one in Africa and parts of Asia and Europe. Mobile payments are just now beginning to gain mainstream attention as consumers’ collective expectations of mobility and technology explode.  The opportunities for banks to capitalize on the wonders of geo-location, the modern smartphone and Generation-M are right in front of them.  Companies like Nooch are going to fill a previously-invisible void in the banks’ value chain.

The small, flexible and innovative small companies like Dwolla, Venmo, Nooch, Square and others are bringing the cash-based economy that used to be under-the-radar into the regulated (and electronically recorded) light of day.  Before the iPhone allowed there to be “an app for everything” banks had no way of being involved in P2P, non-merchant based transfers (except for long-range remittances, or some other niche service.)  But now, banks have a huge opportunity to bring in new revenue without the overhead normally associated with signing up new customers.

The situations where banks can gain new revenue are endless: Johnny paying back his roommate for a bet; Mary sending some money to Johnny at school; Timmy giving a few bucks to the local fundraiser; Stevie contributing his $10 to the fantasy sports pool; or just the casual IOU. If and when these “transactions” become normalized into a smartphone-centric paradigm, the opportunities for new revenue and growth become obvious. Consumers don’t want to be used and abused, but they also understand value, and if these mobile payments services provide enough value, modest fees for using them will not seem unreasonable.  And, even if these services are offered for “free”, banks still stand to gain by having more money in their accounts and more users on their books… which eventually means higher revenues no matter how you look at it.

So far, banks have gotten themselves into one hell of a mess with these new fees for things we got used to thinking of as free. Protests are afoot and consumers don’t like how they’re being treated. Some are fleeing the fee-inducers and seeking shelter in smaller community banks.

By partnering with the more nimble innovators, banks can effectively grab a huge chunk of the coming mobile payments tsunami. Here are just some of the potential benefits for the banks:

  • increased float (more money under their control to invest and earn income from)
  • increased fee revenue from P2P transactions
  • more customers, but none of the expenses of marketing towards or processing new account-holders.
  • Gen-M loyalty: get ’em while they’re young, especially with a hip and efficient product, and today’s 18-30 group will reward you with long-term value
  • association with progressive technology
So, seize the day, banks. Consumers will be annoyed and grouchy for a while in response to the perception of being nickel and dimed at every turn (ever tried to check a bag recently?)  But the consensus-pessimism doesn’t have to hold true:
Our guess is banks won’t get the whole enchilada back, but they will probably get a pretty large portion of that $15 billion through higher consumer fees (or lower services like IBC did last week by closing bank branches). They don’t have much choice. The checking account business is pretty competitive and it isn’t as if there is a big profit cushion that the lost revenues can come out of.
They do have a choice: invest in the future and get on board the Mobile Payments Revolution now. If they don’t, their competitor down the street surely will.  And given their recent history, the big banks probably can’t afford to let that happen.

In August, Wells Fargo in a letter to cardholders in five states announced its plans to assess a $3 monthly fee beginning October 14 for purchases made via debit. “JP Morgan Chase is already charging a $3 fee in some places, such as Wisconsin,” reports the Los Angeles Times. “Regions Bank too has already begun charging a $4 monthly debit card fee, as well as Sun Trust Bank, which now charges a $5 monthly debit card fee.”

Citibank announced earlier this month that while monthly checking account charges will be raised, debit card and online bill pay services will continue to be complimentary.

And IBC Bank, a major regional bank in Texas and Oklahoma, chose to shut 55 smaller branches in order to preserve certain free banking services. According to a survey by Dallas-based SWACHA, consumers are taking a firm stand against debit card fees: 93 percent of Texans would either change banks or use another payment method when faced with debit card fees.

As someone once said, “It’s the man who waits for his ship to come in who’s always missing the boat.”

 

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