Profit-making DDAs

     The chief executive of a major bank confided once in his career that checking accounts "are criminally profitable". This is partly true and partly untrue. In the sense that it seems criminal, a checking account is an ongoing and sure-fire guarantee for retail fee generation. Check processing fees make it difficult for banks to resist. No wonder that the competition for DDA customers is so fierce. Citi is even going door-to-door with its Primerica team.

     At the same time, profit from DDAs are quite legitimate. As long as the consumer has knowledge of the risks and costs of a checking account, this is merely the free market at play. The customer is willing, for any number of reasons, to pay certain fees on paper-based accounts. Nonetheless, certain technologists wish to see the demise of the paper check.

Internet Advertising

     Over the worldwide Web, websites have now eclipsed seven million. The vast majority (over 95%) of these channels do not rely on click-through revenue or eyeball hits. It is clear that only a handful of sites garner most of the attention and carry the most advertising value. Banks have stepped into the arena with banner advertising.

     The startling reality, unfortunately, is that banking customers have shown very little loyalty to the original web sites owner or that portal after they are done exploring other links for the comparison shopping. Channel surfing may stimulate advertising revenue, but it's quite hazardous to genuine fee-generation and cross-selling. Clients know ads that don't sell product should eventually be nixed.

Brand Dilution

     Perhaps the need for a positive, clearly-defined brand is not that critical for a bank in the long-term. Over the past five years, banks have realized the importance of consortia, not only with other banks but also with technology providers. Development of a new product based on extensive joint cooperation such as in the case of "check truncation" results in closer alignment and brand dilution among banks. In experimental projects, brand dilution has no bearing on the question. But when a street-ready product is launched under a single umbrella, dilution is the norm.

     This entire discussion may be academic because the bottom-line almost always rules. A major European bank executive struggled recently when asked how to define the image of the bank's brand. This is not fatal where the offerings are essentially identical; one day branding might resume in importance with a truly proprietary product.

"Good banking is always boring stuff. Boring means predictable and customers like predictability."
-- Peter Burt, CEO, Bank of Scotland.

The CEO Footnote...

Cyclical Income. Major banks have adroitly moved into highly profitable financial services, such as insurance, securities trading, investment banking, and venture capital. In the push for greater profits, banks have found that traditional banking is not sufficient to support sustained revenue and profit growth. This strategy works well in economic expansion. However, even minor interest rate increases for banks produce downward pressure on net interest margin, net asset value, borrowing costs and the banks' own stock prices. Worse yet, an economic downturn puts the direct squeeze on investment banking and venture capital. At that point, banks could reluctantly turn back "traditional" banking. Banks then rush to cut more costs and boost consumer fees, but then customer service can falter. Time for a merger? But what about the stock price?

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