Revenue growth is still the top priority for banks in 2016, and their biggest concern. In fact, in a recent survey, 80% of banks mentioned revenue growth as their biggest challenge this year.
Banks are finding it more difficult to grow margin revenue and are therefore focusing more and more energy on service charge revenue derived from consumer deposit accounts. Increasing service charge revenue is a challenge in itself, as raising fees have a negative impact on retention and uncovering new unregulated value-added service fees is difficult.
As bankers fill up the revenue bucket with fees, the hole at the bottom of the bucket is often left unplugged. One way for banks to increase revenue is to focus on the leakage from fee income – that is, fee waivers. Banks’ service charge fees are very well defined and managed, but few manage fee waivers as closely as other revenue streams like Net Interest Margin. Historically, management relies primarily on bankers’ discretion to make the right fee waiving decision.
No doubt, an individual banker’s ability to waive fees is important in managing valuable relationships – a practice that has been around since formal commercial banking began in the 15th century. However, the banker’s decision is rarely based on analytics, but rather on a gut feeling or on a personal relationship with the client. Consequently (or “as a result”), the decisions are not based on data modeling, leaving the decision as an art form, not embedded in facts. Few banking execs would admit that they are waiving the right fee for the right client at the right time.
I therefore recommend that banks see fee waivers as an investment in the customer experience. As such, it should be managed and evaluated as any other customer investment – regularly and rigorously. Moreover, discretionary fee waivers should be treated like any other expense – it must provide a measurable positive ROI.
The investment in fee waivers each month is significant, anywhere from 3-10% of total fees collected. However, banking executives struggle with understanding ROI impact and measuring its return. You would not run a marketing campaign month-over-month without understanding the ROI impact. Yet, in an environment where efficiency ratios and net income are squeezed, many banks are turning a blind eye to discretionary fee waivers. Only 10% of banks utilize behavior models in their discretionary waiver policies.
By using behavior models, discretionary waivers can be managed centrally, and bankers can focus on providing a better customer experience while at the same time providing the right decision to the right client at the right time.
By applying advanced analytics to fee waiver practices, banks can be empowered to manage fee waivers centrally, adjust criteria based on objectives and measure ROI, and improve customer experience.
Read more on Predicting Fee Paying Behavior and Improving NII Performance or Download a Survey and see why 200 bankers still see growing fee revenue as their biggest challenge in 2016