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Striking the Right Balance: Free vs. Fee Account Strategy

                         Presentation by:

                    ...
Industry Update

   Average member/customer profitability down at most financial institutions following crisis
       Glob...
Legislation and regulation continue to be game changing.


We expect more regulation in the financial services sector in t...
Legal and regulatory developments promise to have a significant
impact on financial services
 CARD Act: ‘Reasonable’ penal...
13 Billion                                     Next
            13 Billion
                                               ...
Income Source Amount
     Overdraft Income $150
    Debit Interchange $36
      Interest Spread $25
        Other Income $...
$218          Opt-In
       -$30                                 How do
                                              you
...
Conclusion



 Credit Unions need to “de-commoditize” their accounts by
    delivering products that build stronger relati...
Polling question 1




                     9
Revenue pressures from legal and regulatory developments are
exacerbated by ongoing consumer behavior trends.




        ...
With consumer confidence shaken, members expect more from their
financial institutions.


                       39%      ...
Community banks rank notably better in the eyes of consumers



                                                          ...
Things that FIs do to build trust


       Put members in the right product
       Deliver incremental value in accounts w...
What All of This Means



   Many national “brands” have disappeared – a few more could also
   falter.

   The winners wi...
How are you handling…

    Current account structure?


    The cost of free checking?


  Number of members who opted-in?...
Polling question 2




                     16
The Decision
    Whether your choice is:
      1. To keep Free Checking, or…
      2. To eliminate/grandfather Free Checki...
Back to Basics


  Embedded accounts that marry financial and non-financial products and
  services

  Development of over...
Polling question 3




                     19
Consumer Insights




                    20
Marketplace Needs


                                                                 I want to acquire
  Will you give me ...
Benefits
   The opportunity to provide
 services and features members
want while also meeting CU needs




       Provides...
Consumers Willing To Accept Change
     Likely behavior acceptance to keep free checking

                                ...
Addition of Relevant Benefits Drives Acquisition
    Individual Appeal                  Likely to Switch or Open an Accoun...
Top Three Categories of Interest
 Consumers continue to want/expect certain benefits from their financial institution


  ...
Best “3-Benefit” Bundle



                          Everywhere Cash                              Everyday Rebate        P...
Best “5-Benefit” Bundle


Everywhere Cash                      Everyday Rebate                       Payment Card         ...
Optimal Account Design


                             Everywhere             Everyday           Payment      Daily Credit ...
Benefits Increase Revenue Potential

Value‐added Benefits Deliver Increased Revenue Potential




         Benefits Bundle...
Research Summary


• Members are willing to pay for value, but increased fees must equal increased
  value

• Members are ...
Sample Fee-Based Program Options
           Examples where the account has a nominal monthly fee,
                    whic...
Illustrative Program: Fee-Based

       New Core Account Design 
       New Core Account Design                           ...
Behavior Change
                     Members have the opportunity to earn down their
                     monthly fee by e...
Sample Account Behavior Scenarios

Scenario A: $6.00 monthly account fee, must meet all           Scenario B: $8.00 monthl...
More Sample Scenarios

Scenario C: $8.00 monthly account fee, must meet all               Scenario D: $7.00 monthly accoun...
Case Studies




               36
Real Value to the Bottom Line
 In addition to extensive revenue to our clients, Affinion services deliver increased tenure...
Case Study: White Label

Identity Theft Solution Generates Incremental Income; Addresses Bank’s Movement
away from free ch...
Credit Union Success Story – Fee Income / Acquisition

Western CU
• $620 Million in Assets
                               ...
Credit Union Success Story –
Incremental Fee Income and Protection for Members
Credit Union in SE
• $1.9B in assets
• 205,...
Credit Union Success Story – Upgrading Benefits


Client - Credit Union in Midwest                           Business Resu...
Re-designing accounts and acquiring profitable members can…


   Deeper and more profitable member relationships
   (Incre...
Thank You

     Todd Werner
Todd.Werner@affiniongroup.com
       (615) 764-2573

    www.affiniongroup.com

    www.nafcu....
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Striking the Right Balance: Free vs. Fee Account Strategies (Recorded Webinar Handouts)

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Striking the Right Balance: Free vs. Fee Account Strategies (Recorded Webinar Handouts)

  1. 1. Striking the Right Balance: Free vs. Fee Account Strategy Presentation by: Todd N. Werner GVP, Business Development and Marketing June 2011
  2. 2. Industry Update Average member/customer profitability down at most financial institutions following crisis Globally, average member profitability declined 5% to 15% since the crisis Efforts by financial institutions to restore member profitability face hurdles 59% reported decreased member loyalty 63% say members more price sensitive 63% say members are ‘shopping around’ more frequently Greater willingness to move away from ‘poor’ service Traditional profit recovery strategies – rate and fee increases, conventional cross-selling and organic growth – will not readily fix the problem. Many will struggle Members have broader expectations Service demands have increased – High-value services, – Relevant offerings, and – High-usage delivery channels June 2010 Accenture study across 35 retail banking institutions 2
  3. 3. Legislation and regulation continue to be game changing. We expect more regulation in the financial services sector in the near future. 3
  4. 4. Legal and regulatory developments promise to have a significant impact on financial services CARD Act: ‘Reasonable’ penalty fees defined Fee limit set at $25 (cannot exceed dollar amount of violation) • Average penalty fee is $391 Bans inactivity fees, multiple penalty fees for single violation Issuers must reevaluate interest rate increases since Jan. 2009 and reduce rate if appropriate Regulation E: NSF/Overdraft fees Financial institutions must obtain consumers’ affirmative consent in order to assess overdraft fees for one-time debit and ATM transactions Banks made preparations to comply Durbin Amendment (part of Dodd-Frank Act): Interchange Implementing in late July Requires debit interchange fees be proportional to cost; Prohibits debit exclusivity arrangements and routing restrictions; Limits restrictions on offering discounts for forms of payment; Limits restrictions on transaction minimums and maximums (credit only) 1Pew Safe Credit Cards Project, qtd. in 6/15/10, “Fed limits card fees to $25, CNNMoney.com 4
  5. 5. 13 Billion Next 13 Billion Legislation. . . 11 Billion 11 Billion Durbin Amendment 9 Billion 9 Billion 7 Billion 7 Billion 5 Billion 5 Billion Reg E ? 3 Billion 3 Billion 1 Billion 1 Billion How many o f yo u r m e u p a y a fee f mbers will How many of yo o r a n a c co checking? unt with NO ca n afford to offer FREE perks? 5
  6. 6. Income Source Amount Overdraft Income $150 Debit Interchange $36 Interest Spread $25 Other Income $7 (Checks/Add Ons) Total $218 Subtract Statements Expenses: Checks Branch Networks Systems 6
  7. 7. $218 Opt-In -$30 How do you replace $188 Interchange $68 -$20 of annual revenue? $168 ($5.66/mo) Future Regs -$18 $150 7
  8. 8. Conclusion Credit Unions need to “de-commoditize” their accounts by delivering products that build stronger relationships between their members and their institutions Credit Unions are looking for strategies and programs that provide high value to members and help substantiate fee- based checking accounts 8
  9. 9. Polling question 1 9
  10. 10. Revenue pressures from legal and regulatory developments are exacerbated by ongoing consumer behavior trends. 10
  11. 11. With consumer confidence shaken, members expect more from their financial institutions. 39% 94% Don’t want all of their accounts Believe trust is somewhat or in one place because they very important in choosing a FI. don’t trust financial companies.* 80% 64% Plan to permanently increase Want to learn more about the amount of money they managing their finances.** save.* *Members with $100K+ household income **Members age 18-24 Source: 5/10, “Seven Predictions for the Future of Banking,” Mintel Comperemedia (webinar) 11
  12. 12. Community banks rank notably better in the eyes of consumers Large Category banks Community banks Easy to do business 53% 81% A bank I trust 48% 78% Friendly 51% 80% Responsive staff 46% 74% Quick problem resolution 41% 70% Source: BAI research report—”Navigating in Turbulent Times—Competing for Deposits and Relationships” (1Q 2010) 12
  13. 13. Things that FIs do to build trust Put members in the right product Deliver incremental value in accounts with fees Be committed to solving a problem Be informed Fee waivers In business: know my business Simple, Easy, Fast, Friendly 13
  14. 14. What All of This Means Many national “brands” have disappeared – a few more could also falter. The winners will be those employing distinctive strategies and tactics that cost-effectively target, attract, and capture profitable deposit members. New products and differentiated acquisition strategies and tactics are essential. 14
  15. 15. How are you handling… Current account structure? The cost of free checking? Number of members who opted-in? Increased branch operation costs? Personal performance pressures? 15
  16. 16. Polling question 2 16
  17. 17. The Decision Whether your choice is: 1. To keep Free Checking, or… 2. To eliminate/grandfather Free Checking, A member engaging account design that allows FIs to provide increased value within their DDA accounts, enhance the member relationship, drive profitable behaviors and deliver incremental fee income. Greater Greater Improved Improved tenured Member tenured Member member member Satisfaction Satisfaction relationships Deeper & relationships Deeper & more more profitable profitable Heightened Heightened member member frequency frequency relationship relationship of member of member s (increased s (increased interaction interaction LTV) LTV) Increased Increased Reduced Reduced member member Member operating operating acquisition acquisition expenses expenses Checking 17
  18. 18. Back to Basics Embedded accounts that marry financial and non-financial products and services Development of overlay strategies to compliment core account Fee checking accounts that are value behavior based with the ability to “earn down” the monthly fee Full or Partial conversion 18
  19. 19. Polling question 3 19
  20. 20. Consumer Insights 20
  21. 21. Marketplace Needs I want to acquire Will you give me more members and tools to protect I want my more deposits. my identity? members to have more products with my Where can I get institution. access to good benefits at a reasonable price? I want to I want to increase the simplify my longevity of my banking member relationships. relationships. I want to maximize Can you provide non-interest income our family with in a way members access to will respond to insurance positively alternatives? Can you give me I want to migrate discounts on from free-checking the things I buy to fee-based everyday? services. 21
  22. 22. Benefits The opportunity to provide services and features members want while also meeting CU needs Provides better value in the checking/share draft account Acquisition members are a 1/3 more likely to open an account if money saving and fraud protection were offered with their account Members Member Retention & Referral are looking for “free” checking Consumers are 60% more likely to and are willing to change their refer/recommend their FI if they were offered behaviors to keep it! money-saving benefits such as Everywhere Cash Savings or Everyday Rebate Rewards 22
  23. 23. Consumers Willing To Accept Change Likely behavior acceptance to keep free checking % Definitely/Very Likely To Do In Order To Keep Free Checking… Consumers are willing to  maintain certain behaviors to keep their account free Responses Based on a 5 Point Scale – Top2 Box = Definitely Likely/Very Likely 23
  24. 24. Addition of Relevant Benefits Drives Acquisition Individual Appeal Likely to Switch or Open an Account with… (Compared to 2010 Research) % 1.5x % 1.3x % 1.4x % 1.5x % 1.6x % 1.5x % 1.4x % 1.1x % 1.1x Responses Based on a 5 Point Scale – Top2 Box = Definitely Would % N/A Switch/Open and Likely Would Switch/Open 24
  25. 25. Top Three Categories of Interest Consumers continue to want/expect certain benefits from their financial institution Consumer Interest Index* ID Fraud   Benefits Savings   Benefits Credit Management   Benefits *Function of (% Def/VL to Switch) x (Mean Score Rating) – Perfect Score = 500 (100% D/VL x 5.0 Mean Score) 25
  26. 26. Best “3-Benefit” Bundle Everywhere Cash Everyday Rebate Payment Card SavingsSM Rewards Protection Nearly 1/3 of U.S. adults would select  this bundle if offered as part of  checking account Discrete Choice Conjoint Analysis determined best “3-benefit” bundle 26
  27. 27. Best “5-Benefit” Bundle Everywhere Cash Everyday Rebate Payment Card Daily Credit Credit Reports SavingsSM Rewards Protection Monitoring and Scores Over 1/3 of U.S. adults would select this  bundle if offered as part of checking  account Discrete Choice Conjoint Analysis determined best “5-benefit” bundle 27
  28. 28. Optimal Account Design Everywhere Everyday Payment Daily Credit Credit Bill Pay or Online Cash Rebate Card Monitoring Reports and Direct Deposit Banking SavingsSM Rewards Protection Scores Acceptance Five of the best value‐added benefits bundled with the best two financial  benefits will realize the highest consumer acceptance level nationwide 44% of U.S. adults would select the account above and pay a monthly fee if  offered those account features Discrete Choice Conjoint Analysis determined the best optimal bundle 28
  29. 29. Benefits Increase Revenue Potential Value‐added Benefits Deliver Increased Revenue Potential Benefits Bundle Includes: Value‐added benefits deliver 63%  • Everywhere Cash SavingsSM • Everyday Rebate Rewards more revenue than a flat monthly  • Payment Card Protection fee.  Plus the optimal account  • Daily Credit Monitoring design encourages cost savings by  • Credit Reports and Scores offering benefits with discount  coupons, cash back and rebates.  It  also provides Identity Theft  protection benefits 29
  30. 30. Research Summary • Members are willing to pay for value, but increased fees must equal increased value • Members are accepting of certain behaviors in order to keep their account free • Members prefer fees they can control • Introduction of fees does not equal increased attrition On average, FIs could expect ~13%* attrition when changing the core account structure; primarily driven by closing shell accounts • It is essential to understand which combination of services drives purchase interest and satisfaction *Attrition rate varies based on brand affinity to the institution. Attrition rate is a combination of: normal account attrition, FI closed the account (shell or unprofitable account), consumer closed the account or converted to another account 30
  31. 31. Sample Fee-Based Program Options Examples where the account has a nominal monthly fee, which is defined by the Institution “Value Plus Checking” “Value Plus Checking” “Secure Checking” “Secure Checking” “Established Checking” “Established Checking” Everywhere Cash Savings – with Daily Credit Monitoring Companion Airfare mobile coupon delivery Identity Theft Insurance Concierge Service Internet Monitoring of Identity Fraud Support Service Elite Travel Services Credit/Debit Cards Free Debit Card Free Mobile Banking Purchase Protection/Extended Free Mobile Banking Preferred Rates on CDs Warranty Free Online Banking/Bill Pay Wealth Management Services Free Debit Card Foreign ATM Fee Waivers Personal Financial Management Free Mobile Banking Discounted Safety Deposit Box 31
  32. 32. Illustrative Program: Fee-Based New Core Account Design  New Core Account Design  Monthly Account  Monthly Account  Requirements Requirements NEW Value-Added Non-Financial Benefits: “X” number of debit transactions/month Everywhere Cash SavingsSM Minimum daily balance requirement Internet Credit/Debit Card Monitoring Enroll in online banking Identity Fraud Support Service Enroll in direct deposit Extended Warranty Enroll in eStatements Purchase Price Protection Enroll in online bill pay Plus the Core Bank Benefits: member Receives member Receives Free Checks / Debit Card Statement Credit Statement Credit Based on Monthly Based on Monthly Free Safety Deposit Box Behavior Behavior Free Online Banking and Bill Pay Free Cashiers & Travelers Checks and Free Notary Services Monthly Fee for Core Checking Account is $4‐7/mo 32
  33. 33. Behavior Change Members have the opportunity to earn down their monthly fee by exhibiting these value based behaviors that are convenient for them and cost effective for you: Drive Positive Maintaining a minimum Going paperless with daily balance of $X electronic statements Having “X” signature- Enrolling in based transactions online bill pay Enrolling in Signing up for online banking direct deposit 33 33 Simple Member Behavior Changes = Highly Engaged Members = Increased Retention & Profitability
  34. 34. Sample Account Behavior Scenarios Scenario A: $6.00 monthly account fee, must meet all Scenario B: $8.00 monthly account fee, must meet all 5 account qualifiers, then all debit transactions are 4 account qualifiers and entire monthly fee is credited rewarded with a $0.25/swipe credit Signing up for Going paperless with Enrolling in Going paperless with direct deposit electronic statements online bill pay electronic statements Maintaining a minimum Enrolling in Signing up for Minimum of 15 debit daily balance of $100 online bill pay direct deposit card transactions Enrolling in $0.25 credit for every online banking debit card swipe Example Outcomes • 24 debit transactions = Full $6.00 credit to account (member paid nothing!) • 15 debit transactions = $3.75 credit to account = qualifier behaviors = buy down behaviors 34
  35. 35. More Sample Scenarios Scenario C: $8.00 monthly account fee, must meet all Scenario D: $7.00 monthly account fee, must meet all 3 account qualifiers, then all debit transactions OVER 4 account qualifiers and fee is reduced to $3.95 (partial $10 are rewarded with a $0.50/swipe credit reward vs. full fee waiver) Signing up for Going paperless with Maintaining a minimum Going paperless with direct deposit electronic statements daily balance of $250 electronic statements $0.50 credit for every Maintaining a minimum Signing up for Enrolling in debit card swipe OVER daily balance of $100 direct deposit online bill pay $10 Example Outcomes • 17 total debit transactions for the month, but only 8 of those were over $10 = $4.00 credit to account • 15 total debit transactions for the month, but only 3 of those were over $10 = $1.50 credit to account = qualifier behaviors = buy down behaviors 35
  36. 36. Case Studies 36
  37. 37. Real Value to the Bottom Line In addition to extensive revenue to our clients, Affinion services deliver increased tenure, deposits and overall lifetime value Average difference between free checking account and an enhanced, fee-based checking account with Affinion benefits Average Balance Tenure Lifetime Value Up to 2.5x 1.7x higher longer 2.3x higher Fee Account, with Affinion Benefits Free Checking $600 - 3 years $900 $480 per year 37
  38. 38. Case Study: White Label Identity Theft Solution Generates Incremental Income; Addresses Bank’s Movement away from free checking; Adds more value in the core account – Partner currently has over 310,000 customers in the identity theft program – Bank will generate $10 Million in net new revenue in 2011 – Bank cross-sells 29%+ of all new accounts into the identity theft program – Bank was rated #1 Overall FI Solution for Assisting Customers in Resolving Identity Fraud (Javelin) – Ranked #2 Overall Best-in-Class Identity Protection Solution for FIs (Javelin) BENEFIT CONFIGURATION BENEFIT CONFIGURATION Credit reports and scores Credit reports and scores Credit monitoring Credit monitoring Credit information hotline Credit information hotline Internet Surveillance Internet Surveillance Identity Theft Insurance Identity Theft Insurance Identity Fraud Support Service Identity Fraud Support Service Credit Card Registration Credit Card Registration Lost / /stolen assistance Lost stolen assistance
  39. 39. Credit Union Success Story – Fee Income / Acquisition Western CU • $620 Million in Assets Business Result: • Branches 20 • Members 56,000 20% cross-sale ratio in the first two months (account launched in April) Need: To develop a brand new checking account designed Nearly 20% of all new checking accounts to create a competitive advantage, drive non-interest have at least one value-added package income, and attract new members/accounts - all (year-end goal 50%) while providing a valuable product that members want and can design themselves. Solution: Program is trending 100 brand new Create 6 different “Packages” ranging from credit checking accounts / week and identity theft services to travel and shopping discounts and services. “Credit Package” as been the most chosen of all package options Let members design their own account by choosing the package(s) they want, for a nominal fee, to add to their account. National media exposure: Forbes, Yahoo Finance, CNBC Leverage CU’s strong sales culture as an opportunity to maximize revenue and program penetration. 39
  40. 40. Credit Union Success Story – Incremental Fee Income and Protection for Members Credit Union in SE • $1.9B in assets • 205,000 members Business Result: Client Need: • Credit Union launched the program with Concerned about the ongoing threat of identity an initial direct mail campaign to 128,927 theft and wanted a comprehensive solution to offer members to members. • Initial mailing achieved a 1.84% Find alternative methods for incremental revenue response rate, equating to approximately by generating a predictable, recurring fee income $151,000+ in annual incremental stream. revenue for the Credit Union Solution: Create a comprehensive, robust identity theft solution • Follow-up mailing was sent to 106,809 designed to proactive mitigate fraud risk for members. Also members achieving a 1.03% response provide personalized resolution and insurance to members rate in the unlikely event fraud does occur. • Approximate current monthly revenue to Offer the solution in multiple distribution channels; in- the Credit Union based on all channels is branch, online and via direct mail, so members can interact $21,000/mo = $252,000+ in annual with the product in their preferred communication channels. incremental revenue for the Credit Union Give members the opportunity to try the product at no charge for 30 days and then just $9.95/mo 40
  41. 41. Credit Union Success Story – Upgrading Benefits Client - Credit Union in Midwest Business Result: • 10K Checking Accounts • Since launch 30% growth rate in the • 19,000 members program to date • Currently: Client Need: • 1882 enrolled in CheckMax/CheckMax Value added checking strategy since 2001 and Plus Account program was strong but growth slowed in 2008. • 19% penetration rate Leveraging member/.consumer insights on our CheckMax checking account program and recommended changing the benefits and upgrading to newer benefits Solution: In August 2009 we launched the revamped checking account program utilizing our “Best Practices” including newer benefits, training, incentives, goal setting. 41
  42. 42. Re-designing accounts and acquiring profitable members can… Deeper and more profitable member relationships (Increased ROI and LTV) Heightened frequency of member interaction Reduced operating expenses Generate incremental fee income Increased member acquisition Improved member satisfaction Greater tenured member relationships 42
  43. 43. Thank You Todd Werner Todd.Werner@affiniongroup.com (615) 764-2573 www.affiniongroup.com www.nafcu.org/affinion 43

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