LAKE FOREST, Ill—In battle for checking accounts, banks and credit unions are taking two very different strategies, according to one economist who believes that in the end consumers are coming out on top.
“The national numbers paint a very clear picture on checking. Free checking is declining, overdraft prices are increasing, and overall cross-selling is low,” said Michael Moebs, CEO and economist of Moebs Services, which recently completed an analysis of bank and CU checking products. “However, behind those national numbers lies massive differences between banks and credit unions. This is information that every American who has or wants a checking account needs to know.”
Moebs said the majority of consumers typically walk into a bank branch looking to open a checking account and nothing else.
“While checking may get you in the door, that’s not the primary service the bank is seeking to provide,” said Moebs. “Checking is the secondary offer for many banks who want to sell a primary service such as a mortgage, large deposit, retirement account, wealth management, insurance, or securities. Many times the branch sales person will use checking as a way to build a relationship. If you take a prime service with the bank, they will often times make the checking account more appealing by doing things like permanently waiving fees.”
27% Offer Free Checking
Research shows that only 27% of banks greater than $5 billion in assets offer free checking, said Moebs. And, more importantly, these larger banks charge $35 for an overdraft.
“This means overdrafts are penalty priced (a very high price) since the bank doesn’t want to deal with ODs,” said Moebs. “Adding to this, banks are incorporating more incentives to the total compensation for branch and call center sales people.”
On the other hand, Moebs said credit unions want to maintain the status quo or keep free checking.
“Some credit unions, including those greater than $5 billion in assets, offer an OD fee at $27.50, which is 21% below larger banks. Therefore, the large credit unions are using their low OD price and a free checking account to get the consumer in the door,” asserted Moebs. “Following the opening of the checking account, the credit union is hoping the consumer will open up another service.”
CUs Are ‘Order Takers’
Moebs termed CUs “superb order takers” while only being average at cross-selling—less than two services per member with the mandatory share account excluded.
“When the cross-sell exceeds three services per member, it shows superior selling. The low incentive structure for credit union branch and call center personnel is reflected in their status as superb order takers,” reiterated Moebs.
Banks less than $100 million in assets have the lowest overdraft price of any size group at $25 per item, according to Moebs Services data.
“Yet, only 40.7% of these institutions offer free checking. Their credit union counterparts offer free checking 73% of the time but have a price at $28 per item, which is even more than the large credit unions,” said Moebs. “In this size category resources are limited producing low cross-sell for all community depositories offering either free checking or low OD price.”
Moebs said that few of these small institutions have the ability to do both free checking and offer a low overdraft price.
With checking diversity becoming more common, the consumer needs a “map” to identify which FI is best for them, said Moebs, who added that his company has designed a Consumer Checking Chart for this purpose.
“The consumer can choose a large bank but must have the knowledge to approach them with the motive to also open up other services in order to build that relationship for a better checking service,” said Moebs.
The Consumer Wins
The smaller community banks give the consumer the lowest overdraft price but fewer free checking offers.
“Smaller credit unions offer free checking but have a higher OD price. In both cases they have a strong small-town outlook and will cut a deal for your business,” said Moebs. “This is the same approach as relationship pricing. Larger credit unions offer both low OD price and free checking with the capacity to have a full line-up of services.”
In the end, if the consumer knows how to shop, they win.
“It’s a buyers’ market, and the time is now for the consumer to find the best checking account,” Moebs said.