Free 99 Banking

I was looking over my bank statement in Mint the other day and realized that I am paying my bank $10.00 a month to for the privilege to keep my money in one of their savings accounts. I quickly clicked on the transaction and noticed that I have been paying this fee for over year. Blood immediately began to rush to my head in embarrassment – I am an idiot. Why hadn’t I noticed this before (there is an easy answer to this – I never check my savings statements – more on this later)?. Of course my next thought was to close the account. I really only have it in case I need to quickly transfer funds to my checking account – also with said bank. Apparently I am not the only person who thinks like this. A recent Javelin study reports that 23% of customers switch banks due to excessive fees. If customers are starting to get wise to the fees they are paying, many retail banks will need to rethink their strategy.

People are not looking to sites like Mint and Wesabe just to see balances. They look to these aggregation sites to help manage their finances. Mint claims that close to 1% of US households use its site. Wesabe does not release exact numbers but claims hundreds of thousands of users. These are significant numbers. I know of banks with over $12 Billion in assets whose internet banking user base is less than half the size of Mint’s user base. That makes sense since Mint claims to be tracking over $50 billion in assets for its users. The point is, these are big numbers that represent significant challenges to banks:

• Consumers who use online financial managers do not have to log into their traditional banking sites as often. This dilutes the value of a bank’s brand and online services.
• Mint and Wesabe both have features that allow users to identify fees in their account history. Users who identify fees will fight to have them removed (lowering income for the bank, while driving up customer service costs) or leave the bank all together. Thus, people like myself who normally overlook fees will receive notice of the fees they have been overlooking.
• Mint and Wesabe are Free. Free is probably the single biggest reason for banks to fear online account aggregation sites. Free is what allowed these online sites to leap frog Intuit.

Account aggregation sites are really just part of a larger problem for banks. The larger problem is the free economy that exists online. Chris Anderson wrote in the WSJ that:

“..consumers are saving their money and playing free online games, listening to free music on Pandora, canceling basic cable and watching free video on Hulu, and killing their landlines in favor of Skype. It’s a consumer’s paradise: The Web has become the biggest store in history and everything is 100% off.”

As the popularity of alternative channels grow, the value (perceived or real) of banking services will diminish. Why? Because that is the way the internet economy works. Chris Skinner of The Financial Services Blog predicts:

“Just like newspapers, blogs, music and even books and live streaming rock concerts, banking will be free. My payments will be processed for nothing. My loans will be charged at zero margin, as will my savings.”

Chris basis his predictions on an assertion put forth by Kevin Kelly :

“Over time the cost per fixed technological function will decrease. If that function persists long enough its costs begin to approach (but never reach) zero. In the goodness of time any particular technological function will exist as if it were free.”

Of course there are caveats to this, but the general principle has manifest itself repeatedly over the past few decades. Newspapers can no longer sell subscriptions, music labels can no longer sell CD’s, and Red Hat software is increasing profits faster than Microsoft. Retail banking services are headed in the same direction.

The good news for banks is that their Internet Banking sites still offer a totality of services that cannot yet be matched by non banks. I cannot transfer funds, pay bills, or open new accounts inside of Mint. The bad news is non bank sites could provide those services in the near future. Imagine a site that combined Mint’s financial services management features with the CD auction features provided by MoneyAisle, money movement services similar to those of PayPal, and loans from a P2P site like that of LendingClub. Throw in a social savings account from SmartyPig and bill payment functionality tied to a decoupled debit card and now you have a full financial services mashup that greatly diminishes the value of the bank that is charging me $10.00 a to hold my money.

Obviously banks will still play a role in the future of retail financial services. But, their value proposition will probably be quite different from what it is today. One thing about the free economy that I neglected to say is that free does not apply to everything. Fees can be had for new ideas and services that add value to a free service. That makes sense because as Kevin asserted costs decrease over time. Meaning, new services do have value. There are free services that people are willing to pay for. I pay an extra fee each year to store extra pictures on my Flickr account. When I find a song that I like, I will pay to download a high quality MP3. I will pay a subscription to access premium news content on the Internet.

To succeed in the free economy, banks must adopt a similar philosophy. Savings account fees are going to drive away customers. Retail Banks of the future will make money by selling their financial expertise, noticing patterns in spending behavior and recommending money saving actions, and by reducing friction by enabling faster payments to merchants, billers, and other customers. Mobile banking also presents a tremendous opportunity for banks to generate fees for premium services. Bank of America claims that it has over 1.8 million active mobile bankers. Mobile users have demonstrated a propensity to pay for premium features. Banks of the future may use their expertise in transaction monitoring and payment and merchant networks to provide premium payment and alerting systems for mobile phones.

The reality is that Banks of the future will probably make money in ways that I have never thought about. The only thing I know for sure is that retail banks will not be making money by charging $10.00 per month for a savings account. To be fair, some banks are trying out alternative ways of garnering fee income. Maybe I will even sign up for it if they refund the last year of $10.00 savings account service fees!