As Lower End Becomes Less Profitable, Banks Focus Marketing on Lucrative 1%

The Masses May Protest Bailouts and ATM fees, but Increasingly, They're Not the Target of Financial Folks

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It's not hard to argue that banks are the most-hated industry in America right now. But as the general public gripes about newly imposed service fees and protests irresponsible lending and 3-year-old bailouts, here's the reality: To banks, the opinions of the masses just aren't as important these days.

As some bankers see it, a lot of customers haven't been pulling their weight. The bad economy and new regulations have made a lot more of them unprofitable. So if those customers get mad and leave, well, the bank may not be shedding many tears.

To reach profitable customers and jettison the money losers, banks are turning to sophisticated marketing-analytics models to figure out not just where to channel their ad dollars, but also how to develop products and maintain branches and ATM locations.

Wes Nichols, CEO of MarketShare Partners
Wes Nichols, CEO of MarketShare Partners

"Acquisition is still part of the game, but acquiring the right customers is more important than ever," said Wes Nichols, CEO of MarketShare Partners, which is growing a stable of bank customers to address those very questions. "Analytics plays a very critical role in making sure you're not only getting the right customers but keeping the right customers and getting rid of the undesirable customers."

Mr. Nichols isn't naming clients, nor is he exactly specifying who those undesirables are, but suffice it to say they're lower income and don't tend to generate a lot of fee income. They don't have the money or inclination to use financial advisory services or other higher-end service offerings. They may no longer qualify for credit cards under tougher post-bubble lending standards, and thanks to new regulations limiting retailer interchange fees on debit cards, those transactions aren't particularly profitable anymore either for the banks.

On the other hand, if you've got an extra $100,000 or so lying around, your banker's still interested. Take Chase's latest offer: $150 to anyone who would graciously deposit $100,000 and keep it around for 90 days, even throwing in free transfers from savings to checking.

That sounds like it would appeal, say, to the 1% of wealthiest Americans. And right on cue, Occupy Wall Street , which claims to represent the other 99%, followed it up with two marches focused on Chase Bank earlier this month.

The segmentation for bank marketers is a little more precise than that 1-to-99 split, but the fact is that a lot of that 99% isn't as profitable anymore, thanks to lower loan demand and new federal restrictions on fees.

Bank of America CEO Brian Moynihan described this bifurcated reality on the bank's Oct. 18 conference call, where he announced BofA beat analyst expectations last quarter, but saw net interest, the difference between what BofA pays for deposits and gets in loan interest, fall 0.4 points to 2.32%. Wells Fargo and Citibank actually posted higher year-over-year profits, unlike BofA, but also lower net interest margins, while profits and margins both fell at JPMorgan.

BofA sees two broad customer groups: the retail customer and the preferred customer group, and it continues to add resources to growing the latter, but not the former. "Preferred includes small business, so we've added financial-service advisors to help capture the investment-side opportunity. We've added more personal bankers. We've added more small-business bankers. And all that has generated significant revenue growth," Mr. Moynihan said. "On the retail business, it is more about optimizing the cost structure. ... This quarter was another 25 or 30 branch reductions. Last quarter, it was 60. And we continue to reduce that ."

Five years ago, banks profited even from customers who had modest checking or savings balances, because they could make enough money on the spread between low or no deposit interest rates and loans. But post financial collapse, that 's not really happening.

Today, a customer who keeps a $1,500 account balance might generate $100 in revenue annually, if the bank is lucky, but cost twice as much to service, said one banking executive speaking on the condition of anonymity because he's not allowed to speak to the media. Those costs come from mailing statements, paying tellers and even owning ATMs, which can run as much as $500,000 to place, or "about what it costs to put in a Burger King" in some cities.

Bank of America, the nation's largest deposit holder, caught major flack last month for adopting a flat $5 fee for use of debit cards, aimed at making up lost revenue from retailer swipe fees. It was following such smaller banks as SunTrust and Regions in the move, but resulted in an uproar that included criticism by President Barack Obama and members of Congress.

Even before the Bank of America fee increases, many consumers were in a sour mood regarding their banking relationships. In a recent consumer survey by the Chief Marketing Officer Council, 32% are "concerned" or "on the fence" about their banking relationships, though 36 % have been with their current bank 10 years or more.

And some competitors big and small have been looking to take advantage of anger over Bank of America's debit-card fee.

"I can definitely point out our debit card has no fees, and I'll go one step further," Citibank CEO Vikram Pandit said at a Fortune event Oct. 12. "I'd point out that we never charged overdraft fees and we still don't charge overdraft fees."

He advocated "simple, transparent" ways to communicate to U.S. customers.

Of course, Citibank is still getting its due.

A day earlier, the bank announced changes for customers of its "midtier" checking accounts that pay interest, including a $20 monthly fee unless the customer has combined balances of $15,000 or more in checking, savings, investment accounts or loan balances. The fee previously was waived for accounts with balances of only $6,000.

A more basic account has raised its monthly fee from $8 to $10 for checking accounts when customers' combined balances are under $1,500, unless they have at least one direct deposit or use online bill pay at least once a month.

But mass stampedes from one bank to another have yet to materialize. The reality is , thanks to online bill paying and the time it takes to set up transfers, switching banks is now laborious for many consumers.

Last month Ally Bank, in the first TV ad from new agency Grey , sought to channel rage over bank fees its way, showing a man standing at an ATM machine hesitating to hit the "accept" button on a $3 ATM fee as various peers pressure him to just hit the button.

"My perspective is , even though everyone agonizes over their products and rates, it's very hard to differentiate on pricing," said former Wachovia marketing executive Jim Garrity, now a marketing consultant. "Service was always important, and it's even more important now given that the playing field has been leveled by all these regulations."

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