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Quick Hits: New Frugality Hits Bank Fees


Brief scrutiny of today's headlines.

Frugality is taking a bite out of banking fees.

Consumers are spending less, and this whacks the banking industry's non-interest income - ATM, overdraft and other customer-service fees.

The volume of transactions is down, reducing the opportunity for banks to increase revenue through fees.

Non-interest income is a key element in just about any bank's revenue. In response to declining fees, banks have become increasingly aggressive in luring deposits away from competitors. This is expensive - and often just shifts money temporarily as customers chase the best deal.

Worse, some prior-fee income opportunities have become free services to attract new customers and retain existing clients. These include Internet banking, ATM transactions within a bank's network, check-writing and carrying a bank-branded credit card.

As a result, a smaller percentage of a bank's customer base often pays an increasing percentage of the service fees. Typically, these customers are at the bottom of the economic heap - less educated and less affluent. This leaves banks open to charges of bias from consumer advocates.

Banks are becoming more aggressive in collecting current fees. Many are imposing new fees, and offering new product packages, but it's difficult to get too far ahead of the competition.

Banks are also scrambling to better control the direct, indirect, fixed and variable costs that underlie packaged services. This increases training costs, because bank personnel have to understand what they're selling and how it meets the needs of the customers as well as of the bank.

In turn, new products drive demand for new reporting procedures to track the balances and activity level of the various packages offered.

Banks must also differentiate themselves from the competition. A successful product or service offered by an innovative bank can be easily replicated by sluggish competitors. And for some banks, a defensive response to product introduction can erode profits. And constantly reviewing product offerings isn't cheap.

Major and regional banks struggle with declining fees. TCF Financial (TCB) said total fees and revenue fell about 3% in 2008 from 2007. Amcore Financial (AMFI) said fourth-quarter non-interest income fell about 7% from 2007.

The bottom line: Decline in the banking industry's non-interest income is good news for customers, but it gives shareholders fits.
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