Why “To Raise or Not to Raise Rates” is a Trick Question

In a prior post, I suggested that raising rates elsewhere in order to compensate for a lowered debit interchange rate cap might not be prudent in every case.

“To raise or not to raise” isn’t really the question. In fact, stated that way, it’s a trick question. It assumes an all-or-nothing approach.  Not all clients are created equal, and treating them as if they are — something too many banks are unwisely all too eager to do — is a costly tactical mistake.

The 80-20 Rule is alive and well in banking. In fact, in banking, the 90-10 Rule often applies. That is, 10 or 20 percent of a bank’s clientele tend to account for 90 or 80 percent of its profits.  That much is not news to bankers. But you might think it was, given the way so many banks take a one-size-fits all approach to targeting and pricing.

A strong brand appeals to a core.  This necessarily entails being willing to appeal less to people outside the core. When a bank markets and prices indiscriminately, its ends up spending way too much acquiring and keeping unprofitable clients, way too little acquiring and retaining profitable ones, and, in the end, not appealing to anyone in particular.  Trying to appeal to everyone is more than the antithesis of branding. It is a misallocation of resources.

It is wiser to separate clients into tiers according to their potential profitability. Clients who more than carry their own weight — in average deposit account balances, average loan balances, product use and share of wallet, to name a few — may be the group you’ll want to cultivate most aggressively. And that may make them the last group you’ll want to risk annoying with increased feeds in the wake of the Durbin Amendment.

Yet you would have every reason, both marketing-wise and bottom line-wise, to consider raising fees paid by marginal clients.

So instead of jumping straight to “to raise or not to raise,” here are some questions to consider first: What is the expected Lifetime Value of each tier of clients? How much will it cost to replace a profitable client who defects because of increased fees? And, for that matter: Are there some clients who, by moving on due to a fee increase, will leave your bottom line better off?

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