What will happen to bank fees in the future?

In my last blog article I stated that Merchant Banks are now making a large proportion of their profits by charging fees to both end consumers or account holders (although they worry about overdoing this to prevent customer “churn”) and to merchants who want to offer payment services to their customers. In the latter, I also suggested, there are many direct and indirect fees in the mix that need to be closely scrutinised. In this follow-on article I want to look take a more philosophical perspective and gaze into the crystal ball a little. I am therefore going to look at what the future might hold for merchant bank fees of all kinds.

The future of Direct Customer fees
Banks tend to charge transactional fees only when a customer has gone beyond what is deemed to be the core commercial relationship. Hence, fees are typically charged to customers when they have overdrawn an account, written a cheque in circumstances where they are insufficient funds to cover it, written a banker’s draft, made a wire transfer or carried out a foreign exchange transaction etc.

Although different banks are likely to try different approaches, most of them will want to move to a more transparent business model with customers. This will involve no fees whatsoever for customers that maintain a minimum positive balance and are willing to tie inward payments to their checking account (such as regular salary payments for example). It may also be that the bank will require some other accounts to be maintained to keep fees at zero (such as having a separate savings account or buying insurance through the bank etc). However, the model here will typically be not to charge fees for normal everyday transactions, and this will include items such as electronic bill pay, peer-to-peer payments online or via a smart phone app and even account balance enquiries online or at an ATM.

Of course, while this free service approach may work well for customers who can maintain a minimum float in a checking account (and also meet the other standards that may be required), many customers will not be able to do this and may actually pay more than they are charged today. As this encompasses many customers who are potentially still very valuable to a bank in the long term, another strategy here (and one that has been adopted already in several banks) is to charge a single standard account management fee (such as £20 or £30 per month perhaps-often also involving some rewards or loyalty benefits being offered too). This would either render all transactional fees at zero (or at least all but the ones that involve a customer going into debt).

Merchant fees
There has been much controversy about merchant bank fees in recent years. This controversy arises mainly from two factors: The first is the scale of these fees (both fixed and variable). And the second is the number of different fees that are levied (leading to much complexity and frustration on the part of a given merchant, much of the time). As we saw in the last article, there are often many separate charges rendered by merchant banks including: Cash processing fees, Cheque processing fees, Discount Fee Rates, Inter-change Transaction Fees, Address Verification Service (AVS) fees, Batch Fees, Monthly Statement or Customer Service Fees, Monthly Minimum Fees, Gateway Fees, Annual Fees, Chargeback/Retrieval Fees, and even Cancellation/ Termination Fees (not to mention other administrative fees relating to copy statements or reminder letters etc). The shear volumes of these different and often layered fees make not only for extra hidden costs but often considerable internal merchant time and effort to check that they are accurately applied.

While it is highly unlikely that merchant side fees will disappear completely, we are already seeing a shift to fees that fall into two categories. Those fees that are seen by a merchant as relatively arbitrary and unrelated to any real cost or contribution (let’s call them bank overhead recovery fees) and fees that are seen by a merchant to relate directly to a particular service or tangibly valuable outcome (let’s call them convenience fees). The future of these two fee categories will be very different.

Overhead Recovery Fees
Overhead recovery fees (rightly or wrongly in reality) are seen to be things like Discount fee rates, Bank Interchange rates, Gateway Fees, Batch Fees, Monthly minimum fees, Annual fees, Cancellation/Termination fees and any fees related to administration (such as charging for an email being sent) etc. What these fees have in common is that most merchants see these costs as having no direct benefit to their business or add little value as far as they are concerned. In fact, most merchants take the view that many of these tasks and processes have been automated or made very simple and cheap in the advent of modern software and/or Internet based technology, and yet fees have remained broadly the same or in some cases gone up. Debit cards in the US, provide a particular example where fees which often average 75 cents or higher were known to be costing a bank 70-80% less than this.

All Merchant banks will continue to compete aggressively with one another to win new customers or to retain existing ones, and price will be their primary tool. This is likely to drive these perceived to be low valued-added overhead recovery fees down strikingly in the next few years. Furthermore, as more and more mainly internet-based payment providers come to the market (with far less overhead to have to recover of course) there is every chance that all of these fees will evaporate completely-very good news for merchants of all sizes and types.

Convenience fees
Convenience fees (again rightly or wrongly in reality) are seen to be things like Cash and Cheque processing fees, Monthly Statement fees, Chargeback/ Retrieval fees etc. Not only do most merchants appreciate that these services have more easily seen effort and cost associated with rendering them but can more readily appreciate the value that they add to them. In other words, these activities would be as costly or even more expensive if they were to be performed by the merchants themselves or some other third-party organisation. In addition, these activities are perceived to add value in many cases by providing efficiency, or even a direct customer service benefit (which either increases satisfaction or can justify a particular pricing position on goods and services). You’ll notice that Address verification fees or Customer Service fees are not automatically listed here as convenience fees. These qualify to be included but merchant banks need to work hard to explain why and how this is the case (whether it is describing the benefit of having a real live person available in a call-centre to help with an unusual transactional event or bring about better credit card security by using look-up database services etc).

For all of these fees, if well-presented and explained, there is every opportunity to continue to charge for the service offered. However, the real opportunity here (to both retain fee income and then to grow it) lies in really getting alongside merchants in helping them to reduce their costs or to increase their revenue (in tangible ways). In this respect the opportunity is to help the merchant get bills/invoices seen more quickly and in digital form, to set up calendarised and recurrent type payments when they want them, the offer aggregate bulk payments (especially in the B2B space), to offering currency exchange service options, to offer greater payment type ubiquity and to offer better analysis and reporting on progressive transactional activity. In addition to this, merchant banks can offer modern internet-based technology to store invoice and payment data, offer alerts and reminders when wanted and even to provide links to better goods and services pricing and payment options in the future. Simply put, fee income in this convenience category can grow, and do so substantially, but only when there is a true partnership and the bank and merchant can both gain from the relationship in real and visible ways.

Summary
The merchant bank fee scene will change dramatically in the next few years. Overhead recovery type fees will reduce dramatically and ultimately disappear altogether in the competitive landscape ahead. However, convenience type fees, or those that can be seen by a merchant to add-value will continue to exist and can grow. This growth however, will be heavily dependent upon each bank’s ability to work in partnership with their merchants and offer technology and services that tangibly lead to lower costs or higher revenues. This will therefore be the big challenge for merchant banks in the next few years.