A new wave of savings accounts designed to address consumers’ alarm about growing debt and shrinking funds are drawing an audience, but observers say they also present some risks.
The accounts aim to make saving money easy, fun, rewarding, or some combination of the three. But consultants say that in rethinking the features and economics of the basic savings account, banks may weaken not only their trusted status with customers, but also the dependability of their biggest and most stable source of profit.
The new accounts offer all kinds of triggers for moving money automatically from checking into savings, as well as matching bonuses and goal-setting tools. With any luck, bankers say, the accounts will help usher in a new era of thrift while recasting banks as partners in lasting savings, as opposed to providers of easy credit.
“To the extent we can help consumers save, it’s good for them and good for the bank,” said Scott Peters, the chief marketing officer at Regions Financial Corp. “We benefit when we have customers on good, sound financial standing.”
The deposit business is the largest single revenue source in all of banking, bringing in about $75 billion annually, according to Oliver Wyman Group, a New York management consulting unit of Marsh & McLennan Cos.
Peter Carroll, a partner at Oliver Wyman, said rewarding customers $200 to $300 annually on low-value accounts, as some banks are doing through new savings plans, is an affront to the traditional business case behind taking deposits.
“It’s tremendously damaging to the profitability of the account, particularly in a product where people are not that price-sensitive to begin with,” he said.
Bankers say they have examined the profitability of the new accounts and expect them either to pay off or to act as loss leaders for expanded relationships built with customers over time.
Wachovia Corp. has been offering its Way2Save account since January. In the first year it pays an interest rate of 5%, as well as a bonus of up to $300, though the accounts are designed so that the balance would rarely exceed $6,000 over three years.
“The product itself for the first few years is not profitable,” said Kathryn Black, the Charlotte company’s savings director, but Wachovia, which has agreed to sell itself to Wells Fargo & Co., expects the accounts to anchor relationships that would expand over time.
Way2Save is automatically cross-sold with a checking account, and after three years account holders are expected to move on to more traditional deposit products, Ms. Black said. “The rest of the relationship should be very profitable.”
Some institutions are pairing a bonus with a relatively low base interest rate, creating an overall reward structure that is not so onerous to support.
“Some of these more innovative accounts are a way of competing without a focus on straight rates,” said Aaron Fine, a partner at Oliver Wyman.
Regions is paying a bonus of up to 1% on the average annual balance, or up to $250, for customers who sign up for automated transfers into its LifeGreen account. The base interest rate on the account is a mere 0.5%.
The account is designed to be profitable from the start, and the business case is sound, Mr. Peters said. “If you look at the APY, it’s still an extremely productive source of funds.”
Offering an interest rate bonus for automated transfers may not result in the best return for consumers, but these offers seem to be striking a deeper chord.
“Consumers don’t act in theoretically correct ways when it comes to the time value of money,” Mr. Carroll said. That concept, combined with the panicked state of many consumers in the current economy, has allowed bank marketers to “find another currency” for pitching accounts.
Bank of America Corp. helped spark the savings innovation trend in 2006 when it introduced its Keep the Change product, which automatically rounds each debit purchase up to the next whole dollar amount, sweeps the difference into a savings account, and matches the amount saved for the first three months.
The account has commanded the attention of competitors. More than 8 million people have signed up, and they have saved more than $10 billion, including over $1 billion from rounded-up purchases and matches from the Charlotte company.
But bankers may find it difficult to create accounts that resonate with debt-ridden consumers while avoiding costly traps.
“When banks are designing reward programs, they need to make sure that they don’t suffer from unintended consequences,” said James McCormick, the president of First Manhattan Consulting Group in New York.
One danger lies in overselling the ease with which rewards can be obtained and leaving customers feeling misled, Mr. McCormick said.
Fumbling the design of one of these high-profile accounts could put a bank’s reputation at stake, Mr. McCormick said. “Banks enjoy a very precious position as the most trusted of financial service providers. They shouldn’t undertake any actions that compromise that trust.”
Potential stumbles are evident in accounts already on the market. For example, consumers looking to boost their savings may be dismayed by the modest addition to their accounts after one year in B of A’s Keep the Change program. According to the company’s Web site, making 30 debit card purchases a month for a year on average would generate an additional $231.75 for the account.
Wachovia’s Way2Save was designed to help consumers save a more substantial sum of money, but some aspects of the account have earned demerits from observers.
“Many Wachovia customers drawn in by the advertising will go away disappointed due to the fine print,” Jim Bruene wrote in his NetBanker blog.
http://www.americanbanker.com/article.html?id=20081117LJB8EMNT&specialreportid=200811171FP1T04Y
