Building profitable relationships with multichannel consumers

www.fisglobal.com
Building Profitable Relationships with
Multichannel Consumers
Consumer Insight Brief
October 2010
Paul McAdam, SVP of Research and Thought Leadership, FIS
Jim Gamble, Director of Research and Thought Leadership, FIS

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© 2010 Fidelity National Information Services, Inc. and its subsidiaries.
Market Upheaval
The challenges facing today’s retail financial
services organizations aren’t only constraining near-
term profitability, but are also permanently altering
the retail banking business model.
By now, these challenges are increasingly familiar to
industry participants — new regulations, future
regulatory ambiguity, increasing expenses
associated with regulatory compliance, higher
capital requirements, etc. The combination of these
structural changes and current business cycle
obstacles (low net interest margins, weak loan
demand, high credit losses, etc.) is forcing many
banking organizations to pursue a new set of
options to organically drive earnings to pre-
recession levels (see Figure 1). The days of barbell
profitability in retail banking, when a small pool of
high-end customers and a small group of extreme
NSF-paying customers subsidized the rest of the
retail customer base, are coming to a close.
A new economic and competitive reality in retail
banking has emerged and executives face a range of
complex business decisions in the coming year.
1) Delivery system rationalization. There is
growing acceptance that banks must reduce
branch operating expenses and increase
investment in self-service delivery channels.
But the pace of rationalizing branch
network coverage is complex as branch
proximity is still a key factor influencing
bank selection for most consumers. Three-
quarters of consumers still like the idea of
having a branch location convenient to their
daily routine, even if they only use the
physical branch a few times a year.
Consumers have repeatedly proven that
there “isn’t a retail channel they don’t like”
and the number of customer interactions

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and transactions with retail touch points
has continued to increase.
It is expensive for banks to simultaneously
maintain robust branch-based and self-
service delivery systems, and the myth of
self-service delivery reducing overall retail
channel operating costs in a meaningful
way has largely failed to materialize. So,
there is a balancing act that must be
achieved. In the new retail banking business
model, consumers will need to repay their
banking providers for all of this channel
access through one or a combination of: (1)
paying higher fees, (2) bringing the provider
greater financial wallet share and (3)
substantially shifting transactions to self-
service channels.
2) New fee income sources. As many
consumers do not have the means to bring
substantial financial assets to their primary
banking provider, there is growing
realization that increasing fees across a
large portion of the retail customer base is
necessary. Increasing monthly maintenance
fees on checking account products is a likely
option for most providers, as is charging
new fees for delivery channel access that
was formerly offered free.
Many executives are closely monitoring the
pricing and product redesign actions of the
U.S. mega banks and plan to be fast
followers. But some banks that have not
experienced severe credit problems and
have remained financially healthy may opt
to sit back and maintain customer-friendly,
low-fee positioning in an attempt to gain a
disproportionate share of new account
volume.
3) Consolidate with the primary bank.
Executives realize that reversing course on
branch network density and scaling back on
free and unlimited banking channel access
will not go unnoticed by consumers. Many
executives are actively working on value
propositions and relationship-based
product packaging approaches that
encourage consumers to consolidate
deposit, payment and credit relationships
with a primary banking provider in order to
avoid fees.
Indeed, many consumers are receptive to
this value proposition. However, as pricing
is the primary basis of competition for most
retail banking services, fee increases will be
a highly visible factor that will likely propel
customer dissatisfaction and switching
behavior. In addition to specialized new
entrants to banking, there are still more
than 17,000 traditional banks and credit
unions operating in the U.S. that will gladly
target disgruntled customers. So if the
“consolidate to avoid fees” value
proposition isn’t right, many consumers
may be prompted to move elsewhere.
While delivery system rationalization, finding new
fee income sources and encouraging consumers to
consolidate relationships are not the only big issues
facing retail franchise executives, they are key
imperatives FIS hears about repeatedly from clients.
In response, FIS has conducted extensive primary
research to establish a fact base and generate
insights to help clients better understand their
options for dealing with these complicated issues.
Building Profitable Relationships with Multichannel
Consumers represents the first in a series of FIS
Consumer Insight Briefs. This particular brief is

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based on a survey completed by more than 4,000
U.S. households in early September 2010. FIS will
publish additional briefs based on analysis of this
data set in coming months, in addition to briefs
addressing retail payments, mobile banking and
small business banking.
Multichannel Delivery Dilemma
The era of multichannel retail banking was launched
approximately 40 years ago with the creation of the
ATM, the ACH Network and credit card network
expansion. Since then, the range of delivery
channels that enable consumers to interact and
transact with banking providers has steadily
expanded. As the number of delivery channels
swelled, consumer adoption steadily followed.
Today, consumers use multiple retail banking
channels (see Figure 2).
With the introduction of each new channel, industry
practitioners hypothesized delivery channel costs
would decline, or at least remain flat, as
transactions migrated from the expensive branch
network. ATMs, ACH, online banking and other self-
service channels have certainly reduced overall per
unit transaction costs and branch transaction
volume, but the number of bank branches has
increased by 18 percent over the past decade. The
overall number of interactions the typical consumer
has with their bank has also increased.
This represents a massive strategic dilemma for
retail banking executives. Recognizing new business
realities, most banking organizations have
designated strategic and permanent cost
efficiencies as a major goal. To many institutions,
this includes rationalizing branch network operating

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expenses as they move past the Great Recession
and into banking in the “2010s.”
But this transition must be handled delicately as the
majority of consumers still use the branch. In our
research, 64 percent of consumers reported using
their primary checking account provider’s branch
lobby for transactions at least once within the past
30 days (see Figure 3). Of those consumers who
reported using the branch lobby, 38 percent used
the branch once, 39 percent used the branch two or
three times and 23 percent used the branch four
times or more during the past 30 days. (Note that
our survey population was completely comprised of
online households). In addition, our research found
that Gen Y and Gen X consumers conduct just as
many in-person branch lobby transactions as baby
boomers and mature consumers.
Self-service channel adoption and utilization is
increasing, just as branch transaction volume is
certainly declining. But branch transaction volumes
are not falling fast enough for many institutions.
The New York-based consulting firm Novantas
estimates that 50 percent of retail bank operating
expenses come from the branch network, while
only 6 percent of operating expenses are directly
attributable to ATM, online banking and telephone
banking channels. The consequences of this are
troubling for banks. As transactions continue to
shift to self-service channels, the unit costs of in-
person transactions within the fixed-cost branch
system will steadily increase and eventually become
unsustainable.
Many banking organizations will rationalize branch
network expenses in the coming years by opening
smaller footprint facilities, closing underperforming

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branches and exiting slow-growth markets. But
given that nearly two-thirds of the retail customer
base still uses the branch on a monthly basis, and
given the branch’s critical role in new account
generation, the sensible management course is to
scale down branch network expenses in a measured
manner.
Capturing New Fee Income
As the transformation of the traditional retail
banking economic model takes hold and executives
grapple with the fact that branch operating
expenses will need to be managed downward over
a multiyear period, the race is on to introduce new
sources of fee income associated with retail
checking accounts and deposit products. The largest
banks are leading the way with new pricing
approaches and product redesign. They have every
intention of gaining back their projected declines in
NSF and debit card interchange fee income.
Bank of America plans to raise minimum balance
requirements over the next 12 months and charge a
monthly account fee for customers who can't
maintain those balances. At a Barclays Capital
conference held in mid-September 2010, Bank of
America CEO Brian Moynihan said, "We currently
estimate over time through these and other items
we are working on that we will have the ability to
offset a substantial majority of the revenue lost
from the various regulatory changes." 1
At the same conference, JPMorgan Chase & Co. CEO
Jamie Dimon commented that regulatory rules
limiting overdraft fees and affecting debit
interchange fees would ultimately force JPMorgan
and other banks to make up the lost fee revenue on
these fronts by charging customers elsewhere.
“We’re going to earn it all back, whatever the
number is,” he said. 2
Regional and community-based banking
organizations are watching the large banks closely
and many will be fast followers in the coming
months. Copying the large banks is clearly one
approach to addressing the fee revenue challenge,
but our research reveals other insights that may be
helpful. While no customer ever wants their
banking fees to increase, banks can take advantage
of pockets of pricing insensitivity.
Any effort to modify retail checking and deposit fee
structures must start with an assessment of the
current level and mix of fees paid by existing
customers. In this regard, the industry has dug itself
into a hole over the past decade. Whereas monthly
maintenance fees on retail checking accounts were
relatively common in the 1990s, this changed as
banks pursued Totally Free Checking strategies to
attract low-cost deposits. Much of this strategy was
linked to aggressive de novo branch expansion and
the need to quickly develop customer bases and
NSF revenue to support new branch business plans.
These strategies have built a pervasive expectation
among consumers that they will pay nothing for
checking account services. Eighty-two percent of
the consumers we surveyed agreed with the
statement, “I do not expect to pay any fees for my
checking account.”

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In fact, many consumers pay no fees for their retail
checking accounts. Our research found that nearly
half (48 percent) of consumers pay no fees
whatsoever to their primary checking account
provider (see Figure 4). An additional 31 percent of
consumers pay $5 per month or less (much of which
is drawn from foreign ATM transactions). Only 21
percent pay monthly fees exceeding $5 per month.
This is problematic for banks as there will be
significant “built in” consumer resistance to fee
increases.
To better understand pricing sensitivities, we
questioned consumers regarding the point at which
increased fees on their primary checking account
would cause them to consider switching the
relationship to another provider. Not surprisingly,
most consumers did not react positively to the
notion of price increases. Thirty-six percent
indicated they would strongly consider switching
their primary checking account to a different
provider if their current provider increased monthly
fees by $1 or less (see Figure 5). This grows to 63
percent of consumers who would consider
switching if their current provider increased
checking fees by $4.99 or less.
While this is certainly not good news for the
industry, there are pockets of opportunity. Thirty-
seven percent of consumers stated it would take a
fee increase of $5 or more for them to consider
switching. Our research uncovered three interesting
facts about this group of consumers who indicated
somewhat lower levels of pricing sensitivity. A
disproportionate portion of them:
Are younger (Gen Y and Gen X) consumers
Conduct a high number of banking

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transactions across all channels
Are at the high end of the spectrum when it
comes to the current level of fees paid for
checking account services.
In summary, the less fee-sensitive tend to be
younger consumers who actively use a wide-range
of banking channels and are already accustomed to
paying fees.
However, banking organizations must be careful
and deploy a sound analytic approach when
determining how to leverage this type of
information to increase fee pricing. One option
often considered by bank executives is to increase
fees among Gen Y customers who conduct a high
number of channel interactions, as many of them
consume extensive channel resources and generate
little, if any, profit for the banking provider. But re-
pricing customers based primarily on characteristics
such as age and channel usage may be a mistake as
banks typically don’t have a complete
understanding of consumers’ entire financial wallet
and wealth potential.
For example, we specifically analyzed Gen Y
consumers who met thresholds of high household
income and high deposit balances held with the
primary checking account provider and all other
financial institutions. The research found that 50

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percent of these wealthier Gen Y consumers were
active users of the vast majority of the banking
channels tracked. Retaining and deepening wallet
share with these Gen Y consumers is vital to the
long-term health of any retail banking franchise. Re-
pricing them in an untargeted manner could
damage the primary bank’s ability to capture wallet
share from other providers. In the worst case
scenario, it could cause these consumers to switch
their existing checking and deposit relationships to
the competition.
Consolidation with the Primary Bank
The data above clearly supports the stance that
adjustments to fee pricing should be pursued
through a robust analytic process that includes
estimates of consumers’ current and potential
relationship value. It also supports the position that
fee pricing should be a key element of relationship
product packages that encourage consumers to
consolidate their deposit, payment and credit
relationships with the primary checking account
provider.
Current industry challenges have led many retail
banking executives to pursue a renewed emphasis
on deepening relationships with existing customers.
Dick Kovacevich, former chairman and CEO of Wells
Fargo, has been quoted as saying, “The cost of us
selling a product to an existing customer is only
about 10 percent of selling the same product to a
new customer.”3
This is a timeless truth in retail
banking. It was true at the zenith of the free
checking era and it’s still true today.
Fortunately for banks, many consumers are also
receptive to deepening relationships with their
primary banking provider. As demonstrated in
Figure 6, approximately half of consumers trust
their bank and are receptive to the concept of

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bringing additional business to their bank in
exchange for a combination of benefits that include
product selection, lower fees and rewards programs.
Consistent with these findings, approximately half
(53 percent) of consumers stated they are likely to
consider bringing additional account balances
and/or products to their primary checking account
provider in order to avoid fees (see Figure 7). But
many of them are younger consumers with lower
balances and lower household incomes. This point
is demonstrated further in Figure 7 with the finding
that among those who are likely to bring more
business to their primary checking account provider
in order to avoid fees, only 33 percent stated they
could consolidate deposit balances of $5,000 or
more. Only 19 percent could consolidate deposit
balances of $10,000 or more. So while many
consumers are receptive to consolidating with their
banking provider to avoid fees, a far smaller portion
has the resources that make the exercise strongly
worthwhile for the provider.
This creates a dilemma for banks. Most are chasing
the top 10 - 20 percent of consumer households
who maintain high deposit balances and multiple
financial product holdings. Obviously, this small
pool of consumers who have the means to
consolidate large balances should be vigorously
pursued. But to maintain the long-term health of
the franchise, banks need to create compelling
products that profitably attract and retain the
remaining 80 percent of the retail consumer base.
This situation is analogous to several major U.S.
industries outside banking, including air
transportation, retail and telecommunications.

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Companies in these industries have recognized the
benefits of preserving relationships with mass-
market consumers. Productively filling capacity (be
it retail store traffic, available seat miles in air
transportation or network utilization in
telecommunications) supports profitability when it
is leveraged, but drains profitability when it is not.
Just as coach-seat customers are essential to
airlines, mass-market customers are essential to
retail banks. 4
The new economic realities of retail banking require
a mass-market approach to: (1) attract the deposit,
payment and credit services these consumers have
available and (2) service this base through low-cost,
primarily self-service channels. While many of these
consumers will be less fee sensitive than the high-
end consumer base, they will not be oblivious to
them. Thus, fee policies should be structured
around encouraging self-service behaviors,
including:
Adopting payroll direct deposit
Using ATMs and the mobile phone to make
deposits rather than in-person branch visits
Using computer and mobile phone-based
online banking for inquiries and balance
transfers rather than live contact center
representatives
Receiving electronic statements rather than
paper statements
Using online bill payment and person-to-
person (P2P) payments rather than paper
checks
Using the debit card for point-of-sale (POS)
and online purchases.
Mass-market consumers may not have large
deposits, and many of them are tied to their

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banking provider only by a checking account, but
many of them actively utilize credit. Thus credit
cards, automobile and student loans can be
packaged into the product offering. Loyalty program
benefits can be coupled with bringing additional
short-term deposit or credit products to the
banking provider and utilizing fee-generating
payment services.
Relationship Product Packages
Dramatically reconfiguring retail delivery channels is
expensive and consumer migration to lower-cost
delivery channels occurs steadily, but slowly, over
many years. Conveniently for banks, relationship
product packages are a viable means to meet the
objectives of reducing delivery channel expenses,
generating new fee revenue sources and capturing
greater consumer wallet share.
It is not necessary for banks to make wholesale,
expensive changes to their retail distribution
systems or product portfolios in order to achieve
these objectives. Selective changes to products,
prices and marketing communications can help an
institution move toward a relationship packaging
approach and allow it to get more mileage from
existing delivery systems and frontline resources.
Pursuing a relationship package approach means
going beyond commodity prices and commodity
product features. A differentiated approach consists
of creating packages that are sold on the basis of
customer need by ascertaining the requirements of
major customer groups. There are a variety of
different variables that can impact package design
(see Figure 8). As we’ve demonstrated in this
analysis, consumer channel behavior should be a
key element impacting package configuration.
At a minimum, banks should create a packaged
offer for their high-end relationship customers, as
well as a packaged offer for mass-market customers
and configure the value proposition elements
appropriately. In the coming years, we expect many
institutions to create families of packaged offers
based on customer segment knowledge (see Figure
9). This transition will most likely revolve around

13
consumer life-stage segments, with unique features
based on in-depth analysis of consumers’
demographics, behaviors and attitudes.
The benefits to a bank of successfully implementing
a relationship packaging approach are numerous.
Well-constructed product packages tend to be more
stable and profitable for a provider. While it does
take more time to sell a relationship package
solution, selling multiple products within a single
package at one point in time is more cost-effective
than cross-selling the same product mix over time.
They can also help an institution create a distinct
position in the marketplace and fend off price
competition, as packaged product solutions are
more difficult for competitors to copy than
standalone products. Finally, relationship product
packages generally increase customer stickiness and
thereby improve longevity, as it is more difficult for
customers to unbundle a package and comparison
shop the component parts.
Conclusion
Banks face many challenges in the coming years,
but challenges always bring new opportunity. A
prime opportunity is to determine ways to
configure products and delivery channel access so
an institution can move beyond commodity status.
After all, retail banking products aren’t that
different from institution to institution; they all
basically do the same things. But the way
institutions enable customers to access those
products and the experiences wrapped around that
access can be differentiated.
Analyzing what customers are trying to accomplish
then using financial products and the sacrifices they
often have to make to access their financial
products and information can be a helpful exercise.
In many cases, products and channel access can be
bundled together and priced within a relationship
context to make it easier for consumers to
complete these jobs.
Consumers will reward a financial institution that
gets this formula right. The institution will be
rewarded with loyal customers who bring greater
wallet share and utilize the institution’s services
more efficiently (lower cost to serve). As the
industry evolves to a business model that is based
on more-equitable and transparent revenue
generation from the mass-market base, this will be
the path to develop profitable relationships with
today’s multichannel banking consumers.

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Citations:
1
CNN Money, “New Bank Fees Hit Consumers,” Sept. 24, 2010.
2
SNL Financial, “Dimon Says FinReg Needed, but too Complicated,” Sept. 14, 2010.
3
USA Today, “Wells Fargo’s Kovacevich Banks on Success as a One-Stop Shop,” March 26, 2007.
4
BAI, “Specialization and the Deposit Business: Implications for Growth and Market Share,” 2005.
About the Research
Building Profitable Relationships with Multichannel Consumers is the first in a series of Consumer Insight Briefs
based on primary research conducted by FIS Enterprise Strategy. The research findings are based on a 42-
question, online survey completed by over 4,000 U.S. consumers in early September 2010. The survey was
fielded by FIS Enterprise Strategy to a consumer panel maintained by Survey Sampling International. The
estimated margin of error rate for this sample is +/-1.6% to 2.3%.
About FIS
FIS delivers banking and payments technologies to more than 14,000 financial institutions and businesses in
over 100 countries worldwide. FIS provides financial institution core processing, and card issuer and transaction
processing services, including the NYCE®
Network. FIS maintains processing and technology relationships with 40
of the top 50 global banks, including 9 of the top 10. FIS is a member of Standard and Poor's (S&P) 500®
Index
and consistently holds a leading ranking in the annual FinTech 100 rankings. Headquartered in Jacksonville,
Florida, FIS employs more than 30,000 on a global basis. FIS is listed on the New York Stock Exchange under the
“FIS” ticker symbol. For more information about FIS see www.fisglobal.com.
Building Profitable Relationships with Multichannel Consumers was authored by Paul McAdam, SVP of Research
and Thought Leadership at FIS and Jim Gamble, Director of Research and Thought Leadership at FIS.
Please contact the authors if you have questions about the research or how the results apply to your financial
institution.
Paul McAdam
Ph: 708.449.7743
paul.mcadam@fisglobal.com
Jim Gamble
Ph: 614.414.4213
james.gamble@fisglobal.com

Building profitable relationships with multichannel consumers

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