Bill Handel Regulation CEO Forum 2011

©2011 Open Solutions Inc. Raddon Financial Group (RFG) is a business unit of Open Solutions Inc. www.raddon.com | 800.827.3500

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The Regulatory Challenge


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Regulation in Financial ServicesPre-1980s 1980s 1990s 2000s 2010s

Environment •Highly Regulated

•Regulatory Phase-out

•Remember the DIDC?

•Dismantling of Geographic Constraints

•Limited Regulatory Product Hurdles

•Card Act•Dodd-Frank•CFPB

Industry Dominance

•Top 5 Banks Control <5% of Deposits

•Top 5 Banks Control <10% of Deposits

•Top 5 Banks Control 15% of Deposits

•Top 5 Banks Control 30% of Deposits

•Top 5 Banks Control 50%

Innovation •Little Product Diversity

•Large Banks Differentiate

•Differentiation across all sizes

•The Era of “Free”

•Share of Wallet Focus

Trends •Checking•Savings•Loans•Branch-based

Delivery

•ATMs•Home Equity

Introduced•First

Relationship Packages

•Cards as an ROE Product

•Home Equity Grows

•Relationship Packages are Common

•Free Checking / OD Programs

•Electronic Banking

•Rewards Programs

•Technology-intensive Relationship Banking Re-emerges

•Profitability is a High Priority


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Checking Account Fee Income

Other Income3%

ATM Income10%

Minimum Balance Fees2%

Debit Card Income33%

NSF / Overdraft Fees52%

Threat:Reg E “Opt-In”Requirements

Threat:Reg II

Threat:Consumer Financial Protection Bureau

Source: Raddon Financial Group, CEO Strategies Group


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Key Provisions of Reg II1. Caps the fee per debit card transaction at $0.21 +

• Applies to both PIN and signature transactions.

• Applies to institutions with assets over $10 billion.

2. Merchants must be provided with a minimum of two non-related debit networks to process transactions.

3. Certain government-administered payment programs and reloadable pre-paid cards are exempt.

4. Implementation Date: • $0.21 cap – October 2011

• Multiple networks – April 2012


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The $10 Billion ExemptionQuestion:

How protected are “protected” institutions (those with assets under $10 billion)?

Answer:Not very, regardless of Senator Durbin’s statements tothe contrary. Why?

1. Merchants must be provided a minimum of two networks through which transactions can be processed.

2. Merchants can direct transactions to the lowest cost network. This will force transaction fees down for competitive reasons.

3. Large banks will not allow a significant interchange fee differential to continue to exist in perpetuity.


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Total Assets ($ Millions) 600.0$ Total Households 50,000 Checking Penetration 55.0% Percent of households with a checking accountDebit Card Penetration 90.0% Percent of checking households with a debit cardMonthly Debit Card Transactions per Debit Card 14.5 Average Debit Card Transaction Size 42$

Estimated Debit Card Income

Current 1,894,860$ ###

After Durbin Amendment 1,033,560$ ###

ImpactNet Change in Debit Card Interchange Income (861,300)$ % Change -45%Change in Net Income per Household (17)$ Change in Net Income per Checking Household (31)$ Change in ROA -0.14%

DEBIT CARD MODELProjected Lost Interchange


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What We Might Expect From the CFPB

“Reasonable and proportional” overdraft fees

Caps on ATM surcharges

Limits on credit card annual fees

Maximum daily overdraft charge

Waiver on de minimus overdraft charges

Increased disclosure requirements on all accounts


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Impact of Re-Regulation

1. Will reduce the size of the playing field

2. Industry concentration is likely to increase

3. Will bend the industry cost curve up

4. Limits the ability to subsidize products or members

5. “Free” becomes a less viable strategy for many financial institutions

6. Increases the focus on relationship development and share of wallet


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Top 10 Largest Retail Banks - Free, if…Free Checking, if…

$500 Direct Deposit or $1500 min chk balance or $5k combined balance

eBanking: Deposits & Withdrawals made electronically or at ATM; and E-Statements requiredMyAccess: Direct Deposit or $1500 min avg balance

Perform any of these 5 actions: Direct Deposit, Debit Card purchase, Bill-pay, Auto Deduction, ACH Payment, Check Paid, Cash Withdrawal at ATM

Value Checking (no bill-pay): Direct Deposit or $1500 avg daily balanceCustom Mgt Package: Checking and Savings packaged: $1,000 balance; or $25 auto transfer to Savings; or Direct Deposit

FREE (no requirements) – No longer advertising Debit Card Rewards

FREE (no requirements) – Debit Rewards being phased out (4/30/11); ATM rebates for Avg Monthly Bal $2k+ being phased out (9/12/11)

Direct Deposit or $1500 Deposit Balances or $5000 Combined Balances

FREE (no requirements) – No longer advertising Free Debit Card Rewards

$100 Min Daily Balance (waived for 1st 12 months); Includes Debit Rewards and ATM Rebates

6/3/2011 - FREE becoming “Bright Banking” (fee waived if direct deposit or $1500 chk balance, or $6k combined balance, or any BB&T mtg)

= Recent change

https://www.wellsfargo.com/


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Seven Factors in Free Checking Decision1. Bias towards growth or profitability?

• What is your current member profitability

2. Your current market position – leader or niche player?• How is the rest of the market responding?

3. Demographics dictate potential• Your current member base

• The markets in which you compete

4. How effective are you in selling product and building relationships?

5. What is your existing value proposition?

6. Do you have other options for growing non-interest income?

7. What are your core system capabilities?


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If Free Checking Is Your Choice…Question:

If you decide to continue to offer free checking, how should you leverage this decision?

Answer:1. Set strict cross-sell metrics for the organization and measure at the branch

level. – Focus on reducing the percent of checking accounts that are “single-

service.”2. Implement formalized Onboarding Program to enhance cross-sales after

onset of new relationship.3. Target “high opportunity” non-members within three miles of branches

with direct mail.4. Implement technologies that assist in the frontline cross selling process.5. Aggressively push cost savings tactics such as e-statements.


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Example: Non-Free Checking LineName Features Interest How to Get to Free Targets

“Basic”“Electronic”“Pay as You Go”

Flat monthly fee Ala carte pricing Debit card fee

No E-statements, or Minimum direct

deposit, or Debit card activity

Fee Driven Low Income

Depositor Credit Driven

Minimum Balance Checking

Free debit card Free online

banking/billpay

No Keep required minimum in checking account

Middle Market Mid Income

Depositor

Relationship Checking

Free debit card Free online

banking/billpay Other benefits

Yes Keep required total relationship balances

Include only “core” accounts

Mid Income Depositors

Upscale

Credit Checking Couples checking with credit card

E-statement req. Offer CC Rewards

Yes 10 credit card trans per month, or

$3000 in CC balances

Credit Driven Upscale


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What You Need to Do

1. Determine whether you can continue to offer free checking.

2. Reduce the degree of subsidization in the member base.3. Increase focus on margin income and reduce reliance on

non-interest income.4. Diversify non-interest income sources.5. Focus on building share of wallet through more effective

marketing and relational pricing.6. Keep your fee structures simple.

News & Politics

Bill Handel Regulation CEO Forum 2011