“The old model is basically broken,” William S. Demchak, CEO of PNC Financial Services (NYSE:PNC), said last week at a gathering of industry analysts. “Given the changes in the operating environment, banking in the future has got to be very different from banking in the past.”
It isn’t often that a CEO of Demchak’s caliber makes absolute claims like these in a public forum. A survey of the speeches given by his peers at the same conference shows that most hemmed closely to the industry’s prevailing talking points about fee income diversification and expense reduction.
And Demchak didn’t just leave it at that. He went on to map out what he perceives the future of banking to be. While there were a number of pieces to the puzzle, one of the more interesting ones concerned his thoughts on the industry’s long-practiced habit of giving away free checking accounts.
For the past few decades, banks have used free checking accounts to establish initial contact with customers. On its second-quarter conference call, an analyst asked John Stumpf, CEO of Wells Fargo & Co (NYSE:WFC), whether there is a “lead product you guys have that sort of leads cross-sell?”
Yes, it’s checking accounts. That’s why when I wake up in the morning, I get here, the first thing I look at is the checking account report from the day before. I love checking accounts. I dream about them. I just — because it’s a formational account for a consumer.
The problem is that this is a money-losing proposition. As I’ve discussed before, according to the consulting company Moebs Services, the average checking account costs the nation’s biggest banks between $350 and $450 per year. Meanwhile, the average revenue per account comes in at an only $268. In other words, the average bank loses a minimum of $82 on each of its free checking accounts.
This is the backdrop, in turn, for Demchak’s observation that, “what is clear is that the model in which the industry has operated for decades just is not sustainable today.”
In the old days, a bank could give away our core product, checking accounts, and we’d make our money on the interest on deposits, overdraft and other fees, and the interest that we collected on loans. It’s really not so true anymore. Industry revenue has been negatively affected by billions of dollars due to the historically low interest rates, the higher cost of regulatory compliance, and the significant reduction of our overdraft and other fees due to regulatory changes.