The Fall of Fees and Swiss Neutrality — Why Banks Are Cancelling Reliable Revenue
Bank fees are a major profit center for retail banks. Is rising pressure to be socially responsible driving change?
Fees make fickle consumers furious
Consumers loathe fees.
Consumer watchdogs and Elizabeth Warren fans everywhere rightly point out that fees typically impact the most economically vulnerable among us. And usually at the worst possible times. Banks charged these fees during the recession brought on by COVID-19, for example.
People are sick and tired of fees. And Citi Bank knows it. More specifically, the new CEO of Citi Group, Jane Frazer, knows it. As snow and ice melted into slush around the country, Citi Group made the announcement they will indefinitely freeze several types of fees across their consumer banking divisions. Just days later, Chase announced the same.
Why are banks surrendering this revenue? Why now? Because actions that consumers consider ‘good’ are now table stakes.
It’s a big deal they’re announcing the end of fees like this. Banks make billions a year by charging fees. Citi alone booked $70 Million last year in fees. If that sounds like a lot, check out how $70 million is dwarfed by Wells Fargo’s annual fee revenue of $1 billion.
As it turns out, charging customers $35 here, $15 there, and another $25 there — for nonsufficient funds (NSF) fees, late or returned payments, monthly account maintenance, and wire transfers — added up to billions in annual revenue for just a few of the largest banks.
This has long been a reliable source of revenue. This has also long been a source of customer complaints. Why surrender this revenue? Why now?
As Matt Egan at CNN Business pointed out, Citi may have the least to lose and most to gain by being the first to ditch fees. They make less than their major competitors on those revenue lines, anyway.
Now, with full oversight of the company, Jane is likely evaluating an ever-evolving landscape of fintech companies — as competitors, possible partners, and acquisition targets. Neo-banks excel in the digital experience next-gen customers demand and charge minimal fees. Jane would know the existential threats to Citi’s retail banking survival. She was previously the CEO of Citi’s Global Consumer Bank for 19 different markets, including the US.
In other words, she surely understands candy bowls at a physical bank location aren’t how you win or keep next-gen business.
Buildings are out. Digital is in.
In fact, since her promotion, Citi has also announced plans to close laggard retail bank acquisitions worldwide. This was a smart move by Citi Group’s board. Jane clearly gives Citi a jump on understanding where to cut losses and re-focus.
Changes in bank behavior and social responsibility
Banks appear motivated by consumer demands to do better.
If that can be taken at face value, that’s savvy business. According to McKinsey’s recent report, Inflection point: Seven transformative shifts in US retail banking, “actions that consumers consider ‘good’ are now table stakes for banks.” Gen Z consumers are particularly socially conscientious buyers. Research shows they will pay more to buy from trustworthy brands.
Neo-banks like Chime offer perks like early access to stimulus checks and workplace direct deposits. Neo-banks are growing at nearly 50% a year because of popular programs like this while many of the nation’s largest banks continue building brick and mortar locations instead of mastering digital engagement channels. Banks without robust and reliable digital experiences are seeing consumer turnover skyrocket as they opt for more modern neo banking services with greater social awareness.
The social and racial reckoning happening in America is also showing up in a new banking DEI culture. Institutions like Fifth Third Bank, based in central Ohio, have made pledges in the billions to racial justice. Fifth Third’s pledge includes $500 million in investments, $60 million in financial accessibility, and $40 million in philanthropy in addition to the $2.2 billion in lending.
Similarly, investments in the Environmental, Social, and Governance (ESG) flavor of corporate responsibility are growing. Three weeks ago, a group of banks launched a member network dedicated to ESG best practices, standards, self-assessment, and benchmarking. Their priorities include advancing diversity, equity, and inclusion; promoting employee wellbeing; and engaging with communities. Bank of America and T Rowe Price are the two largest retail banks as founding members. The founding Director expressed confidence the member group will develop “principles of good environmental, social and governance practices.”
The social solvency of Swiss and Sachs non-neutrality
During WWII, Nazi atrocities weren’t enough for the Swiss to step in. Neutrality is an ugly, ashen color in that light. But that was before the world was globally interconnected — politically and especially economically.
The world gasped in a collective moment of shock when, last week, Swiss banks made the dramatic decision to exit Russia. It was clear that would portend the exit of others. Sure enough, today — roughly two weeks into Russia’s invasion of Ukrainian — Goldman Sachs became the first major US-based bank to leave Russia.
If the Swiss and other banks known for servicing the ultra-wealthy of the world stayed neutral now, it’s apparent a global community of customers could crush them by taking their business elsewhere. While a plausible explanation for ending their 500-year stance of neutrality, this surely does not account for the whole picture. In reality, massive social change is always a factor that’s difficult to quantify at the moment. Historians are often better able to contextually analyze what drives decisions from a variety of angles than thought leaders operating in the vacuum of real-time.
But the growing scrutiny to do right by consumers is clear. Even the Swiss have picked a side.
