How Banks will Generate Revenue on Payments and Checking in the New Era

How B k will G H Banks ill Generate Revenue on t R Payments and DDA in the New Era y BAI Payments Connect Conference Moderator: David Kerstein, Peak Performance Consulting Group Panelists: P li t : James Allen, Broadway Bank Alex Calicchia, MidSouth Bank , Dominic Venturo, US Bank

Agenda Introductions The b i Th burning platform: l tf impact of Reg E changes Industry survey What to do? Near term impact Longer term issues: what will it mean? Q&A © 2010 Peak Performance Consulting Group - Page 1

Introductions David Kerstein President Peak Performance Consulting Group dkerstein@ppcgroup.com Jimmy Allen Group EVP, Retail Banking Broadway Bank jallen@broadwaybank.com jallen@broadwaybank com Alex Calicchia EVP and Chief Marketing Officer g MidSouth Bank acalicchia@midsouthbank.com Dominic Venturo Chief Innovation Officer, Retail Payments Solutions U.S. Bank dominic.venturo@usbank.com © 2010 Peak Performance Consulting Group - Page 2

Scary times! Up to 70% of non-interest fee income at stake Solicitation for webinar on industry website y Free Checking Could Go the Way of F f Free Toasters” T t ” Article headline Sweeping Away Free Checking? Article Headline © 2010 Peak Performance Consulting Group - Page 3

New Reg E opt-in rules: everything changes opt- The facts: Without positive opt-in cannot charge opt in, overdraft fees that occur as a result of ATM or Debit transactions (some exceptions) Opt-in required for new customers effective Survey Respondents July 1; existing customers August 15 Significant revenue at risk, impacting fundamental profitability of checking accounts 17% Reality h k R lit check – surveyed over 100 i d t d industry leaders 9% Bank 111 Respondents 83% were Bank or Credit Union executives Credit Union 74% Over 50% were C-level executives Consultant, Supplier Survey conducted in first 2 weeks of February, 2010 0 0 © 2010 Peak Performance Consulting Group - Page 4

Most think the impact will be in the 10-20% range 10- Impact of Reg E Changes on OD/NSF Income Over 30% 15% 20-30% 24% 10-20% 38% Less than 10% 16% Minimal Impact Mi i l I t 6% 0% % 10% % 20% % 30% % 40% % 50% % © 2010 Peak Performance Consulting Group - Page 5

Our analysis confirms 15-20% impact for most 15- banks Number of % of Total % Total EFT or ATM Impact NSF/OD s NSF/OD’s DDA Accts NSF/OD only – assuming Income % Income 60% Opt-in No NSFs 74% 0 0 0 1 to 4 12% 3% 1% <1% 5 to 9 5% 9% 4% 2% 10 to 19 4% 18% 7% 3% 20+ 5% 70% 29% 12% TOTAL 100% 100% 41% 16% Source: 2008 FDIC Study of Bank Overdraft Programs, Peak Performance Analysis Some “opt-ins” are more valuable than others: S “ ti ” l bl th th 9% of customers generate 78% of fee income © 2010 Peak Performance Consulting Group - Page 6

It’s not over: more restrictions coming Do You Believe There Will Be Additional Regulation Negatively Impacting DDA Revenue? More restrictions coming 70% Opt In Rules are all we'll get 30% 0% 10% 20% 30% 40% 50% 60% 70% 80% Survey Comments: potential risk areas Debit interchange Regulators will impose more restrictions “While Dodd Bill may not pass other legislation likely – Banks are While pass, strong populist target for both parties” © 2010 Peak Performance Consulting Group - Page 7

Implementing Op-In Rules: Most still formulating Op- plans (survey conducted Feb. 1-15) How are you implementing Opt-In rules? Handling everything in-house 41% Prioritizing efforts agains high users 25% Contacting all customers 25% Using vendors for communications 24% Using vendors to collect and certify opt-in's 14% Using vendors for telephone campaigns 5% 0% 10% 20% 30% 40% 50% Does not add to 100% due to multiple answers © 2010 Peak Performance Consulting Group - Page 8

“What actions will your bank take to address decline in deposit fee income” Actions My Bank Will Take Eliminate Free Checking 14% Add or increase fees 25% Reduce expenses 34% Focus on Bus. Banking 35% Sell new optional fee services 43% Increase emphasis on Debit 47% Revise DDA Accounts 55% Increase cross-sell efforts 57% 0% 10% 20% 30% 40% 50% 60% 70% © 2010 Peak Performance Consulting Group - Page 9

Most believe industry will add fees and eliminate free checking – but not their bank! “What actions will your bank take?” compared to “What actions will most banks take?” Largest Gap: My Bank vs. Industry 75% Add or increase fees 25% 46% Eliminate Free Checking 14% Industry 68% My Bank y Sell new optional services 43% 48% Reduce Expenses 34% 0% 10% 20% 30% 40% 50% 60% 70% 80% © 2010 Peak Performance Consulting Group - Page 10

Who will be the winners in the new environment? Agree or Strongly Agree Community Banks Credit Unions Large Banks Non-banks (e.g. PayPal) 0% 10% 20% 30% 40% 50% Survey Comments: “There’s room for everyone” “Execution is key, not type of institution” page 11

What to do? Five Categories of Options Raise fees f R i f for Re-structure R t t Innovate New I I t N Improve Sales S l existing services Existing Products And Relationship Checking Management Accounts Reduce Operating Cost © 2010 Peak Performance Consulting Group - Page 12

What do we need to do? What is impact? Agree or Strongly Agree Need to innovate new DDA products 81% Increase investment in new payments 78% technology Need to invest more in CRM 71% Bank mergers will increase 63% Doom and Gloom is overstated 42% Reduce distribution costs/close 36% branches 0% % 20% % 40% % 60% % 80% % 100% % © 2010 Peak Performance Consulting Group - Page 13

How some banks are approaching the new reality Stop selling Free Checking Impose new fees Value added, fee based, insurance services to enhance products Early Access program, “overdraft on request” Fee based premium features with “Build To Order Free Checking” Innovate new products: Virtual Wallet cash management checking © 2010 Peak Performance Consulting Group - Page 14

Top Five Take-Aways! Take-Aways! 1. Enormous revenue is at risk – management of the opt-in process is critical 2. It won’t get easier: deposit fee income will continue to be under pressure, and more restrictions are likely 3. It s 3 It’s not a revolution, but an evolution: most banks won’t impose revolution won t significant new fees or completely eliminate Free Checking 4. There is no silver bullet: banks need to re-focus on building profitable relationships. It’s been too easy to sell “Free” and make fit bl l ti hi It’ b t t ll “F ” d k money on fees. You need to have the right technology (CRM at the point of customer contact), effective on-boarding, and strong sales process to succeed. l t d 5. Product innovation – and a culture of innovation, testing, and continuous improvement – is critical in this new and uncertain p environment © 2010 Peak Performance Consulting Group - Page 17

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How Banks will Generate Revenue on Payments and Checking in the New Era

by David Kerstein on Mar 25, 2010

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