Deposit Fees: Here Comes the Judge
Fees. And Spread.
Deposit fees have been on the decline for some time now (see chart). Part is because of changes to regulation, including Dodd-Frank and the dreaded Durbin Amendment. But some is also customer behavior modification. Although the overwhelming customer response to automatic overdraft coverage was positive (customers preferred their checks to be covered rather than bounced), the fees served the additional purpose of changing customer behavior.
It should be noted that the 13 basis point decline in deposit fees equates to $2.2 million in annual revenue to the average financial institution ($1.7 billion in deposits, on average). How does a bank make that up? If they did it on personnel cuts, the average bank would have to reduce staff by 44 employees. But reality lies somewhere in a combination of cost savings, revenue enhancements, and reduced profits.
Back to the checking account and its $420 annual cost. According to my firm’s peer database, each retail DDA account averages $25 in fees per year. That means the checking account must generate $395 in spread to break even. Pick a spread number… say 3%? The checking account would have to carry an average balance of $13,167 to cover its costs. That’s to break even!
My point to Messrs. Chris Dodd, Barney Frank, Dick Durbin,and Richard Leon is you don’t know squat about how businesses make money. Why don’t you analyze a McDonald’s value meal, where all the margin is made on the Coke. Price fix the Coke, and the price of the burger or fries will go up. So be it in the checking account. Think about that the next time in the drive thru buddy.
Any thoughts on Judge Leon’s genius comment that the fixed price on a debit interchange fee should be seven to twelve cents?