From Free to Fee: Monetizing Mobile Deposits

Is your mobile banking channel a cost center or a profit center?

If your answer references that your mobile channel is 'saving you money' by diverting transactions from more costly channels, then I need to ask you how much you have reduced your CSR team, your teller staff and/or closed your branches as a result of mobile banking use?

You can generate revenue from your mobile channel, however, by building new pricing models that include fees for value-added services. As part of a new monthly series, 'From Free to Fee', I will be discussing revenue opportunities from several emerging financial services beginning with today's post on mobile deposits.

I am not the first to propose that banks and credit unions take a harder look at mobile banking from a revenue perspective. In fact, in May, 2011, Jim Bruene, publisher of the Online Banking Report and the NetBanker blog and founder of Finovate, proposed that new pricing models could propel online and mobile services to the next level in his Online Banking Report entitled, 'Creating Fee-Based Online Services'. He stated, "Unlike the $35 debit card overdraft fee, there are rational and understandable reasons for charging fees for value-added online and mobile services."

In his report, not only did Jim provide an historical perspective as to why and how banks and credit unions continually end up giving away their services, he provided 33 different services that could generate a fee and offered a perspective on the acceptance level by eight different customer segments.

In my post, I am going to try to tackle the opportunity for charging a fee for mobile deposits . . . even if your institution currently does not charge for the service. I will be referencing several research reports to provide rationale, especially a recently released pricing optimization study produced by Market Rates Insight entitled, Growth and Revenue Potential of Emerging Financial Services. This 168-page study covers 13 different emerging financial services, with insights into fee optimization, targeting, institutional differences and bundling options (I reviewed this study in a recent blog post).

I will also provide implementation and marketing recommendations based on my travels across the country and my work at New Control Direct and Digital. 

Note: A audio podcast of a 'Breaking Banks' interview by Brett King of Jim Marous and Dr. Dan Geller from Market Rates Insight around how and why banks should generate revenues from value added services is available for download here.

Moving From a Cost Savings to Revenue Generation Perspective

Many banks are under substantial pressure to reconsider the economics of retail banking, especially given the decline in net interest margins and the reduced income from sources such as debit interchange and overdraft fees. While there has been a slight rebound in deposit service fees lately, many fees are associated with services on the decline (mortgage refinancing).

Net Interest Margin for Banks with Assets > $10B

Aggregate Deposit Account Service Charges for Banks with Assets >$10B

There is no doubt that cost cutting has and will play a role in the effort to offset these reductions in income. But how much more can costs be cut without an impact on customer service or falling behind in the race for advancements in innovation and technology?

Another option is to have more customers pay for services that were previously 'free' like checking accounts. This strategy has been implemented by many banks over the past few years as evidenced by the decline in institutions offering free checking today (39 percent) compared to 2009 (76 percent) according to Bankrate, Inc. Many banks have also increased their overall service charge structure as well as the requirements to avoid fees.

The strategy of increasing fees on these basic services comes at a cost, however. According to the J.D. Power and Associates' 2012 U.S. Bank Customer Switching and Acquisition Study as well as a study conducted by the Deloitte Center for Financial Services, these types of fees lead to defections. 

A better option may be to build a new fee structure around emerging financial services that bring added value to the customer. Similar to options available when you purchase a car, these new fees could be singular line items and/or could be bundled into 'value packages' that the customer could select. The key is for financial institutions to no longer race to the 'free' finish line, but to assess a logical cost for benefits that bring a value to the consumer.

So, how big is the opportunity for generating additional revenue from mobile RDC?

Mobile Deposit Marketplace Potential

According to recent research by Mitek Systems, more than 12 million mobile users have made deposits exceeding $40 billion using their mobile device. In fact, four of the top banks in the country have reported extraordinary volumes of mobile deposits when considering the relative infancy of this service.

• Bank of America: 1M/Week
• JP Morgan Chase: >3M in May
• Wells Fargo: 1.4M in May
• PNC Bank: 450K/Month

The percentage of the largest financial institutions offering mobile remote deposit capture has almost tripled in the past two years, with 64 percent of the top 25 retail banks offering mobile deposit in 2013, up from 48 percent in 2012 and 22 percent in 2011, according to Javelin Strategy & Research. 

In addition, according to research from community bank mobile app provider, Malauzai Software, Inc., the usage of mobile deposit varies from organization to organization. Best-in-class financial institutions have approximately 20% of their active mobile banking end-users making deposits monthly and the average bank or credit union has 10% of active end-users making mobile deposits monthly. Average usage increases to 15%-17% of active end-users when looking at activity over a longer, 90-day period. 

The growth in mobile deposit use is not expected to subside any time soon either. In a June 2013 Celent survey of US internet active consumers, mobile deposit was the second most highly valued capability surveyed, with two-thirds of smartphone users ranking the capability “highly valuable” (6 or 7 on a 7-point scale). Among those surveyed, mRDC was more highly valued than person-to-person payments (54%) and the emerging capability to enroll a new bill payee using the phone’s camera (46%) which a handful of banks offer.

“Mobile deposit, the ability for consumers to quickly and easily deposit checks using their smartphone or tablet cameras has become a must have for banks as consumers increasingly adopt a mobile lifestyle,” said James DeBello, CEO of Mitek, San Diego.

Mobile Deposit Customer Profile

According to the Spring 2013 Raddon Financial Group National Consumer Research, mobile deposit is currently done by 7 percent of households, with 21 percent of Gen Y households using the service and 30 percent of higher income (>$50,000) Gen Y households using mobile deposit.

Indexing the age, income, balances and behavior of the mobile deposit user against all households (index=100), a mobile deposit user is younger (by 14 years), has a higher income and loan balance, has an average checking balance, and provides interchange income that is higher than the norm. Not shown is the fact that these households have average mortgage, equity and credit card balances.

  

Mobile deposit users, as expected, index significantly higher than the average household as to their likelihood of opening a new checking account online, and are more likely to use mobile payments, apply for a loan online, use a prepaid card and even make a payment through social media.

Bottom line, mobile deposit users are heavy users of all mobile services . . . or heavy users of mobile services and heavy mobile deposit users. The research also found that these customers use the branch at a rate that is 66 percent of the average customer.

Mobile Deposit Revenue Opportunity

One of the selling points of mobile banking has been the reduced costs of delivery of the channel. Estimated cost of in-person or call center delivery is quoted as roughly $4.00, with the cost of a mobile transaction being quoted as $.19. Even if we assume that these are accurate estimates of the fully loaded costs of each channel, an assumption that there is a 1:1 offset of transactions is definitely faulty.

Taking these assumptions one step further, if we assume one transaction per month, some quote a cost savings of close to $50 per mobile customer per year. This is highly unlikely (as presented by Bob Meara, senior analyst from Celent in a recent blog post).

While it is definitely easier to assume the cost savings above and to simply sell 'free', this leaves a great deal of potential revenue on the table based on recent research from Market Rates Insight. In the report, Growth and Revenue Potential of Emerging Financial Services, executive vice president and author of the report, Dr. Dan Geller, provides evidence of the willingness of consumers to accept 'value-added fees. In other words, while increasing fees on traditional services such as checking accounts will be seen as punitive and met with resistance (and potential defection), there is an opportunity to sell emerging financial services such as mobile deposit either singularly or as part of an enhanced service bundle.

In the study, both the importance of mobile deposit and perceived value of the service were measured. In the case of mobile deposit (13 emerging services were evaluated in the study), this evaluation was able to illustrate that more could be charged for a premium level of service (such as same day availability) while a lower fee could be charged for slower availability.

According to the study, 56 percent of consumers who did not already have the service found mobile deposit important to some degree. The average value consumers place on this service is $2.63 per month, while the 3.5 percent who found the service extremely important would pay $5.60 per month as shown below.

Mobile Deposit - Level of Importance (MRI, 2013)

Mobile Deposit - Distribution of Monthly Value (MRI, 2013)

The MRI Study also provided these distributions for different types of institutions (national, regional, local and credit unions).

Demographic Variances

From the perspective of demographics, it was interesting that the importance of mobile deposit was stronger for females (72.8%) than for males (64.9%) but that males were willing to pay significantly more on average for mobile deposit per month ($3.89) than their female counterparts ($1.82).

In addition, as would be expected based on the Raddon Financial Group research noted above, the importance of mobile deposit as well as the willingness to pay for the convenience decreased with age, while the importance and willingness to pay increased with income (specific details of these values are available in the report).

Potential for Bundling

Market Rates Insight (MRI) also developed revenue optimization scenarios for 26 different bundles of emerging financial services. Of the 26 bundles, four included mobile deposit as part of the service combination. These bundles included:

• Mobile Deposit with P2P Payments (optimal value of $8.38/mth)
• Mobile Deposit with Credit Score Reporting (optimal value of $8.57/mth)
• Mobile Deposit with Billpay, Low Balance Alerts and Prepaid (optimal value of $10.04/mth)
• Mobile Deposit with Payment Protection (optimal value of $9.23/mth)

While the development of optimal bundles would differ by customer composition, type of institution and competitive scenario, an analysis such as the one below combining mobile deposit with P2P payments illustrates how the analysis was performed for each bundle. As can be seen, while total revenue could increase with the addition of more services, the incremental revenue would actually decrease due to cost of offering and lower customer acceptance of an expanded bundle.

Overall Monthly Fees from Mobile Deposit/P2P Bundle + Add'l Services

Incremental Fees from Mobile Deposit/P2P Bundle + Add'l Services

"One of the most revealing and significant findings from our latest study on emerging financial services is that the principle of diminishing return applies to the bundling of financial services," states, Dr. Dan Geller, the author of the report.

Competitive Overview

Of the top five banks in the US, only U.S. Bank charges a fee ($.50) for each mobile deposit. Fees have been collected since 2010 by U.S. Bank, and while not currently supporting the Blackberry platform, mobile deposits are possible via an iPhone, iPad and Android devices. As with most programs, there are daily and weekly deposit limits.

Regions Bank is the other larger bank that currently charges for mobile deposits. Unlike the flat transaction fee charged by U.S. Bank, Regions has a sliding fee scale based on availability of funds. Immediate availability has a fee 1%-5% of the check amount with a minimum of $5. Overnight availability is $3 and 'standard processing' (two business days) is only $.50 per check. The 'standard' processing is actually faster than any of the 'neobanks' (Moven, Simple, GoBank) at this time. 

"Obviously, customers aren't going to be happy with any kind of cost you throw out there," stated Greg Melville, product owner of mobile products and payments for Regions Bank. "But if you offer a value-added service, such as immediate access to their funds, they have shown that it's something they are more than willing to accept." There was also some negative feedback initially, especially on social media, but very few of the complaints resulted in customers actually leaving the bank.


"FedEx pioneered the concept of higher fees for greater expediency and now consumers are expecting the same option from their financial institutions especially when it comes to mobile deposits," states Dr. Geller.

Jim Bruene, who was one of the first to write a study on the potential for fee revenue from mobile services applauded Regions Bank on their decision to charge a fee, but still believed it would have been better to include mobile deposit as part of a larger bundle with a monthly subscription fee. He also believed the fee structure is overly complicated.

Dave Kaminsky, a senior analyst at Mercator Advisory Group, a research firm focused on the payments industry, explained that users perceive mobile banking's offerings as worth the cost. "Customers tend to look at remote deposit capture or expedited processing as an additional value, so they're willing to pay for it—at least for now."

Many of the other large banks do not currently charge a fee, citing that the value of the mobile deposit customer is higher than average (as shown above), that they are less likely to leave the bank because of this 'sticky' service, that mobile deposits reduce their costs (somewhat debatable) and that there are more transactions that generate interchange income. While each of these arguments may be true to varying degrees, I still believe needed revenue is being left on the table.

The Process of Transitioning from Free to Fee

Despite all of the logic above around the why a  bank or credit union should charge for mobile deposits, the real challenge is in answering the how question without alienating your customers, frustrating your sales teams or negatively impacting the growth potential of mobile deposits. If there is a question around moving from a free to fee strategy, then research your customer base, competitive position, internal capabilities and institutional priorities. If there is not enough rationale around making this transition, maybe now is not the time.

According to James "Alex" Alexander, founder of Alexander Consulting, there are four options available when trying to implement fees when the market (or your current strategy) may be giving services away for free.

1. Don't Do It: With the potential challenges to moving to a fee-based structure, maybe it is better to wait until all impacted parties buy-in. Selling 'free' is easy. Selling 'fees' is hard.
2. Just Do It: This strategy is based on picking a date and letting customers and all employees know that there will be fees from the selected day forward. The upside is that this strategy is simple. The downside is that phones will ring and you need a very strong constitution to decipher the customer (or employee) threats from the reality. The key here is to not make exceptions, because exceptions quickly escalate into more and more fee waivers. If your entire team understands and believes the value proposition, they should be in a position to help stem attrition (there will be some).
3. Grandfather Existing Customers: Under this strategy, current customers who have used mobile deposit will not be charged, while any customers who use the service for the first time after the transition date will be charged a fee. The challenge is that customers (and employees) talk, potentially undermining this strategy.
4. Productize the Old and Sell the New: The challenge with any of the above strategies is that they can trigger a powerful, negative psychological response -- people don't like to have something taken away from them or to have differential treatment for a segment of the customer base. In this scenario, mobile deposit continues to be given away, but in a lower value manner. For the majority of organization, this approach is far superior to the others since the customer is given a choice of services and fee options.
• Productize the old: With 'basic' mobile deposit, this can be done by extending the period for funds to clear. Similar to what Regions Bank has done, change basic mobile deposit to a 7-10 day clearing period.
• Sell the new: For 'premier' mobile deposit, the clearing time can be reduced to 3 days or even shorter. When given the option, most customers will willingly opt for the faster clearing of deposit and will pay the fee. Another option is to include 'premier' mobile deposit in a bundle of mobile benefits as discussed above, with the option of charging an even higher fee.

Five Keys to Marketing a Fee-Based Mobile Deposit Program

To fully benefit from the a fee-based mobile deposit program, the solution must be marketed to customers. For those who have used the service, it is extremely simple and time saving. For those who haven't, it could be considered confusing and even scary from a perceived security and risk perspective. Similar to making a deposit at an ATM, until a customer tries the process and realizes it works, there can be barriers to acceptance and use. Here are five quick ideas to stimulate mobile deposit usage:

1. Free Trial: When you buy a new car, many come with satellite radio already installed and ready for use. In my case, I would never have taken this option at the time of sale, but would have most likely waited or never turned on the service. With the free trial (and very complete up-front training), I not only enjoyed the service . . . I now pay for it on a monthly basis. For mobile deposit, make a huge deal about this service an its benefits. Educate the customer up front and get them 'hooked' on the 'premium' mobile deposit service. After the trial, penetration of the service will be much greater and the opt-in rate for a faster clearing (and the fee) will be greater.
2. Incent Your Team: Don't compensate on sales volume alone, compensate on profitability (or at least reaching a minimum 'premium'/bundle penetration benchmark). By providing incentives, your front line will spend more time educating customers and will emphasize the benefits of your 'premium' mobile deposit service or bundle. Make sure your expectations are that all new customers will begin to use mobile deposit immediately.
3. Don't Accept Deposits: O.K., maybe a bit radical, but when a customer wants to deposit a check into their account in a branch, use this transaction as a customer education opportunity. Either arm your tellers with a tablet device used exclusively for mobile deposits (and other training) or use another available terminal in the office.
4. Build an Educational Video: a short educational video serves several purposes including being a landing page for online and mobile banking customers, providing a location for linking email communication, and providing a tool that can be used in the branch when a customer opens an account or wants to deposit a check.
5. Leverage Digital Communications: Don't be afraid to regularly email customers about the benefits of mobile depost. If you have implemented either a 'premier' or bundled mobile deposit product, each email will more than pay for itself. In addition, monitor customers who continue to deposit checks in your branches. Remind these customers (through email, direct mail, online banners, digital retargeting, mobile banners, etc.) that they can save time by taking advantage of mobile deposit.

The key to success in generating revenue from mobile deposit programs is to 1) communicate the value of the service, 2) provide customers the option of not having to pay (or use the service), 3) reinforce the importance of 100% acceptance of the process to all internal teams through education, mandate and incentives, 4) continuously market the service, 5) build a segmentation strategy and 6) measure results.

"Amid the growing proliferation of digital channels and rapidly evolving consumer behavior, retail banks can no longer afford to adopt a one-size-fits-all approach in devising and enhancing their mobile strategies," says Vin Malhotra, consulting partner for Banking and Financial Services with Cognizant Business Consulting, Cognizant's consulting practice. "Providing innovative and personalized mobile services based on consumer segmentation will enable banks to not only run better by maximizing their investments, but also run differently by strengthening customer engagement and driving greater adoption of mobile banking for competitive differentiation." 

If properly positioned, packaged, sold and reinforced, not only will your employees and customers understand the rational of moving from free to fee, but the service will serve as a retention tool as customers become more comfortable with the benefits and value the fee options. 

And mobile deposit will become one of several new revenue engines within your institution.

Coming Next Month: How to Generate Revenue from Mobile Bill Payments

Additional Resources 

Growth and Revenue Potential of Emerging Financial Services - Market Rates Insight (2013)

Study on Emerging Lifestyle Financial Services - Market Rates Insight (2012)

The Mobile RDC Cost-Savings Myth - Bob Meara on the Celent blog (August 2013)

The US Mobile App Landscape: An Annual Evaluation of Mobile Banking at Top US Banks: Celent (June 2013)

Leveraging an Omnichannel Approach to Drive $1.5B in Mobile Banking Cost Savings - Javelin Strategy and Research (July 2013)

Creating Fee-Based Online Services - Online Banking Report (May 2011)

Retail Bank Pricing: Resetting Customer Expectations - Deloitte (April, 2013)

Three Things You Need to Know About Mobile Deposit - The Raddon Report (August 2013)

The State of Consumer RDC 2011 - Celent (November 2011)

2011 Mobile Remote Deposit Capture: Creating a Compelling Business Case for Mobile Servicing - Javelin Strategy and Research (May 2011)

The ath Power Mobile Banking Study - ath Power Consulting (2013)

Mobile Deposit: Why Now . . . and How - Mitek Systems (2012)

Mobile RDC: Changing How Consumers Bank and Banks Compete - AlixPartners (October 2011)

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The Revenue Power of Emerging Financial Services

With interest rates remaining low and traditional fee income impacted by recent government regulations, banks and credit unions are increasingly looking for new ways to make up the shortfall in revenues.

Despite continued pressure from consumers around 'fee anxiety' and our industry's habit of giving most services away for free, there are still opportunities to promote customer loyalty and generate new non-interest sources of income according to new research.

In the most comprehensive fee optimization study of its kind from Market Rates Insight, Inc. entitled, 'Growth and Revenue Potential of Emerging Financial Services', the importance and value of new financial services are evaluated to determine new revenue sources as well as ways to attract and retain customers. In the study, it was found that there is a willingness from consumers to accept 'value-added fees' for services that are viewed as valuable.

"For the foreseeable future, deposit rates will remain flat and loan demand will be soft, so financial institutions will need to rely on fee revenues for income growth," states Dan Geller, EVP of research at Market Rates Insight. "To convert services from 'free' to 'fee', banks and credit unions will have to identify new services that consumers want and are willing to pay for. The study shows organizations how to use service fees to expand profits and penetration with both new and existing customers."

The 150-page study (available here) examines 13 emerging financial services and includes a competitive survey of 10 financial institutions, assessing the importance and value of each service, segmenting banks and credit unions as well as demographic segments for variances. The highlights of the study include:

• Financial institutions can sell four times the number of financial services they currently do by offering more 'leading edge' services consumers find valuable
• Only 13.1 percent of consumers receive emerging financial services from their financial institution, yet 54.6 percent of consumers who don't have these services find them important
• The highest potential from growth in revenue from emerging services is with larger organizations
• The highest ranking services in terms of potential growth are credit score reporting (71.4%), identity theft alerts (70.8%), payment protection services (64.6%) and same-day bill pay (58.7%).
• The value placed on emerging financial services is inversely correlated to the age segment of consumers, with younger consumers placing higher values on the new services evaluated
• Consumers value and will pay a premium for specific bundles of services more than they value individual services, but there is a point of diminishing return for the revenue potential of bundles relative to the expense of additional services
• The mid-range revenue potential for an optimal bundle of emerging services is $10.12 per month.

Growth Potential

The study found that financial institutions are underutilizing the potential for selling emerging financial services to consumers regardless of the institution size or type or consumer demographic segment. Overall, only 13.1 percent of consumers were found to use any of the emerging services reviewed, while 54.6 percent of the consumers surveyed indicated that they would be willing to pay a monthly fee for the service(s). 

While there is significant potential for growth with all sized organizations, the potential was correlated to the size of organization, with larger institutions having a greater opportunity than regional banks, credit unions or smaller financial institutions.

As can be seen from the chart below, there is significant variability between the current use and potential demand for emerging financial services. As could be expected, the use of overdraft protection was currently the highest (42.9%), followed by low balance alerts (23.3%). Interestingly, identity theft protection was the most popular emerging financial service, with 91.9 percent of households desiring this service overall, followed by overdraft services (86.3%) and low balance alerts (80%).

Services with the greatest growth potential in the future include credit score reporting (71.4%), identity theft alerts (70.8%), payment protection services (64.6%) and same-day bill payment (58.7%). In fact, virtually all of the services analyzed had significant upside potential.

"These findings are significant because they come at a time when banks and credit unions are experiencing a decline in fees on traditional services such as NSF and interchange fees due to new regulations and greater scrutiny by the CFPB," states Geller.

Importance and Value of Emerging Financial Services

The level of importance consumers place on various services has a strong and positive correlation to the perceived value of the services. Based on the findings in the report, the services desired supported three major functions in our evolving lifestyle:

1. Concern for digital identity and security: reflected by identity theft alerts and credit score reporting services
2. Increased mobility: reflected by mobile deposit and bill pay services
3. Desire for Efficiency: reflected by the desire for same-day bill pay, person-to-person payments, payment protection and overdraft services 

By evaluating the level of desire for these services and testing different pricing points, banks and credit unions can develop an escalation model of service features. In other words, higher fees can be charged for a premium level of service (same day mobile deposit) with a lower fee charged for a slower level of service.

In the report from Market Rates Insight, each of the 13 emerging financial services were evaluated with regards to level of importance from consumers not already owning the service, with a dollar value placed on each level of importance. An average level of importance and average value was also assigned. Digging even deeper, the report also analyzed each of the 13 services with regard to type/size of institution.

Mobile Deposits

As an example, 46 percent of the consumers who do not currently use mobile deposit services find this service important to some degree, ranging from slightly important (17.5%) to extremely important (3.5%). Based on the study, the average value consumers place on this service is $2.63, with the value jumping to $5.60 for the consumers who find mobile deposit extremely important. The potential is higher for larger institutions, with customers of smaller organizations willing to pay a bit less. 

Mobile Deposit Distribution of Importance (all institutions)

Mobile Deposit Distribution of Value (all institutions)

This analysis is consistent with a separate mobile banking study conducted by ath Power Consulting where it was found that one in three consumers would be willing to pay for some mobile banking services. Remote deposit capture was the most sought after mobile banking feature according to the study.

"Retail customers are becoming less resistant to monthly fees for mobile, with a third saying they would be willing to pay for mobile banking," said Michael McEvoy, ath managing director. That is up from the one in five during last year's study, he said. 

Despite this demand and value placed on the service, banks and credit unions remain reluctant to charge for mobile deposits. While a few banks and credit unions are testing the waters like U.S. Bank and Regions Bank, all are charging substantially less than the price customers are willing to pay according to the research.

Beyond the revenue potential for remote deposit capture, institutions can save operating overhead as well. According to a new report from Javelin Strategy and Research, financial institutions can save $50 for every customer encouraged to use mobile deposits. Javelin estimates that it costs about $4.25 for each deposit made in person in a branch. The same transaction costs $0.10 when done using a remote deposit capture application.

Identity Theft Alerts

Another example of significant revenue potential is with identity theft alerts. Consistent with many recent mobile banking findings around concern for security and desire for more mobile alerts, the potential for generating additional fee income with identity theft alerts (as well as low balance alerts) should not be ignored.

As shown below, 40.8 percent of customers find the offering of identity theft alerts either 'very important' or 'extremely important'. Not only is the distribution of importance skewed positive, but so is the value placed on this emerging service. While those who do not find the service as attractive are willing to pay more for the service, the average monthly value placed on the service is still $2.71.

Identity Theft Alerts Distribution of Importance (all institutions)

IdentityTheft Alert Distribution of Value (all institutions)

In the MRI report, all 13 emerging services are analyzed the same as above for all institution sizes as well as for each financial institution type, providing a way for bank marketers and product managers to compare results for like institutions.

Demographic Perspectives on Emerging Financial Services

The overall average importance of each of the 13 emerging financial services analyzed is relatively similar when viewed based on gender. There are some differences, however, with females finding mobile deposit capture more important than males (72.8% vs. 65%) and male consumers finding prepaid loadable cards more important.

While the differences in importance of emerging financial services is close to identical from a gender perspective, there is a substantial difference in the value that each gender places on these services. In fact, males placed an average value ($4.16) that was close to twice that of their female counterparts ($2.44). 

From a demographic perspective, the MRI study found that the more mature the consumer, the lower the value placed on most emerging financial services. Possibly reflecting the need for more guidance in financial affairs, the younger demographic segments placed a very high value on security, credit reporting and identity theft services, while the Gen Y and Gen X consumer also placed a high value on eldercare services, possibly reflecting the need to care for elder family members.

Finally, as could be expected, there were significant differences in the importance and value of emerging financial services when viewed from an income perspective. 

Revenue Optimization of Emerging Financial Services

As opposed to offering each of these services as part of a menu of individual options a customer can select from, Market Rates Insight found that the bundling of multiple services into logical combinations increased the value potential for banks and credit unions. Obviously, there are many different combinations of services possible, but MRI found that the principle of diminishing returns applies to the bundling of financial services.

Dan Geller states, "The principle of diminishing returns states that demand for services is curved and that any additional consumption beyond the highest point in the curve produces less return. In the case of financial services, the recurring monthly fee consumers are willing to pay for a bundle of services usually begins to diminish after an average of about three combined services."

Interestingly, the optimal point of fee revenue typically occurred before the highest fee-revenue point on the curve.

As a point of illustration, one of the 26 bundles developed by MRI provided the highest fee revenue when low balance alerts, identity theft services, mobile photo bill payment, location-based couponing, eldercare services and payment protection were combined for a total monthly fee of $10.20. 

However, the optimal fee-revenue occurs after bundling only the first three services - low balance alerts, identity theft services and mobile bill payment - for an optimal monthly fee of $8.68. The incremental fee revenue beyond this point begins to diminish significantly, without enough revenue to cover the cost of providing the additional services.

Overall Monthly Fee Income From Bundled Service Package #26

Incremental and Optimal Fee Income From Bundled Service Package #26

Another argument in support of optimizing the service bundle combinations is that many consumers are willing to pay a higher overall monthly fee for the optimal bundle than they would for each service separately. 

For instance, in the above case, study respondents indicated they would pay an average of $2.71 for identity theft services, $2.53 for mobile photo bill pay and $2.43 for low balance alerts. The total fee for these services would be $7.67 individually, while the consumer would pay $8.68 for the optimized bundle - a premium of $1.01 or 13%.

The study provides strong support for the logic of service fee optimization. Twenty-six bundles are featured in the study, with each bundle consisting of an average of three services for an average fee revenue potential of $10.12 per month. When you take into account another finding in the study that 68% of consumers desire these services, an institution can generate an average of about $120 annually in recurring fees from two-thirds of its customer base.

Mission for Financial Marketers and Product Managers

As an industry, we have gotten gun shy around fees due to consumer backlash regarding checking account fees and related services over the past several years. MRI studied bundling this year because in 2012 they found that FIs were giving away too many services for free. According to Rick Barham, CEO and founder of Market Rates Insight, "Our experience told us that it’s very difficult to go from “free to fee” without adding value, and we believed that the best way make this leap was via bundling “free” with other services. Our Study indicates our assumptions were right, and consumers do place importance and value on bundles that support their lifestyles."

This timely study from MRI shows that banks and credit unions no longer need to cower when trying to increase non-interest income. In fact, there are many emerging financial services consumers are willing to pay for either individually or when associated with service bundles.

Conservatively speaking, the study illustrates that institutions who focus on providing valuable services to consumers can generate as much as $10 per month from up to two thirds of the customer base. The key is to use the study results to match data to individual customer segments and to place revenue generation high on the list of strategic priorities for 2013, 2014 and beyond.

Now is the time for financial marketers and product managers to work together to determine the best way to move away from being a utilitarian organization, offering all new services for free to a value focused organization that is willing to assess a fee for value added services.

Find Out More

There’s a lot more to the new 'Growth and Revenue Potential of Emerging Financial Services' study that can't be covered adequately in this blog such as the breakout of results by institution type, the 26 online optimization reports and the competitive analysis, which shows how top financial institutions are integrating these services. In total, there are more than 250 illustrations in the report with high levels of detail that would be valuable to financial marketers and product developers.

Feel free to access the report with the link below. The author of the report, Dan Geller, has also offered to answer questions from my readers about the report by email at dan.geller@marketratesinsight.com.

Additional Insights

Growth and Revenue Potential of Emerging Financial Services (Executive Summary) - Market Rates Insight (June 2013)

Growth and Revenue Potential of Emerging Financial Services (Full Report) - Market Rates Insight (June 2013)

Integrated Study on Service Fees - Market Rates Insight (May 2012)

The Untapped Potential of Emerging Financial Services and Service Bundles  - Market Rates Insight Blog (June 2013)

Mobile Deposits Boom Means More Money For Banks - Market Rates Insight Blog (July 2013)

The 2013 ath Power Mobile Banking Study - ath Power Consulting (June 2013)

Fee Revenue Optimization Analysis - Market Rates Insight (July 2013)

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