Banks offers students no-fee checking and other benefits in order to develop long-term relationships

In recent weeks, there has been a good deal of coverage in business media on how banks plan to make up for the loss of debit interchange income, assuming the Durbin Amendment is passed. Much of the discussion has centered on rolling back on debit rewards, eliminating free checking, and increasing ATM fees.

However, it appears that these changes will not apply to student checking accounts.  For example, TD Bank recently introduced a new range of six checking accounts, only one of which–TD Student Checking–does not carry a monthly fee.  A perusal of leading bank websites shows that most offer a dedicated student account with no monthly fee and no minimum balance requirement.   The checking account is the most important product in building a relationship with customers, so expect no-fee student checking to continue.

In addition, banks will seek to build on the checking account relationships with:

  • Student banking bundles
  • Student credit cards
  • Special offers and benefits, such as no fees for using other banks’ ATMs, discounts on fee-based products, higher rates on saving accounts, or lower APRs on lending products
  • Range of virtual service options (Internet banking, mobile banking, social media)
  • Financial advice and planning tools

The combination of these products and services is designed to ensure retention of the customer relationship during that crucial period when students graduate and move on to a new life stage.

Discover 1Q11 financials illustrate continued recovery for card issuers

Discover Financial typically reports quarterly financials one month before other leading U.S. credit card issuers. As such, its results are seen as provider leading indicators of the overall health of the credit card industry.

Discover reported 1Q11 financials on March 22. The following highlights from its results show that leading credit card issuers continue to recover following the crisis that impacted the industry in the second half of 2008. Note the following trends for some key credit quality metrics:

  • The net principal charge-off rate fell 304 bps y/y and 99 bps q/q to 5.96% (crucially, the charge-off rate is below 6% for the first time since the fourth quarter of 2008)
  • The 30+ day delinquency rate fell 180 bps y/y and 47 bps q/q to 3.59% (this is the lowest rate since the fourth quarter of 2007)

With credit quality now returning to more normalized levels, is Discover shifting its focus towards growth?  The 1Q11 results provide some contradictory evidence:

  • End-of-period credit card loans were down 3% year-over-year (y/y), with Discover attributing the decline to a higher payment rate on the part of cardholders.  However, the rate of credit card loan decline is slowing (y/y decline of 6% in 3Q10 and 5% in 4Q10).  And Discover’s CEO said that he expects credit card loans to growth in the second half of 2011
  • Discover card sales volume rose 7% y/y to $24.0 billion
  • Marketing and business development spending rose 60% year-over-year to $136 million in 1Q11 (due to seasonality in marketing spend patterns, quarterly trends are typically not very useful

So, there is evidence that Discover is investing for growth, but that it will continue to be conservative with regard to lending, and will aim to have a balance of spending and lending growth.

Banks focusing attention on the mass affluent market

Recent news and presentations from leading banks show a widespread desire to grow the mass affluent segments. Some examples:

  • At its recent Investor Day, Bank of America highlighted mass affluent as a key customer segment as it aims to achieve its objective of leveraging the franchise–driving closer relationships between different business units in order to grow share of customer wallet.  Earlier this year, the bank launched Merrill Edge, a new integrated banking and investment platform, for mass affluent clients.
  • Citi reorganized its U.S. credit card and retail banking units, with each unit creating segments dedicated to affluent customers.  It also recently launched a range of premium cards (ThankYou Preferred, ThankYou Premium and ThankYou Prestige) for affluent cardholders.
  • At a recent Citigroup Financial Services Conference, SunTrust highlighted mass affluent as a targeted growth area.
  • This month, Capital One introduced the “Match My Miles Challenge” promotion to attract new customers to its high-end Venture Card.
  • Chase radically simplified its credit card product portfolio, with cards now dedicated to specific customer segments, including the Freedom card, which is targeted at the mass affluent segment.

To reach and serve this segment, banks first need to conduct comprehensive research into the characteristics, financial needs and behaviors of mass affluents, as well as into the competitive environment.  Insights from this research feed into: new products and services; advertising and branch merchandising; pricing decisions; level of online and offline service provision; as well as training and ongoing support for branch and call center personnel.  It is also imperative that the bank’s organizational structure, processes and systems to support, rather than inhibit, targeting efforts.