JPMorgan Chase & Co., the largest U.S. bank by assets, said about 70 percent of customers with less than $100,000 in deposits and investments will be unprofitable following regulations that cap lenders’ fees.
“I’m trying to give you a proxy for what the banking industry has to look forward to if you don’t take into account business bank clients and getting more of the affluent wealth wallet,” Todd Maclin, chief executive officer of consumer and business banking at the New York-based company, said today at an investor presentation.
The biggest U.S. banks are grappling with lost revenue from regulations that cap debit interchange fees and overdraft charges, making customers with low deposits more expensive for lenders to manage. JPMorgan, run by CEO Jamie Dimon, sees its greatest opportunity with affluent customers that have more relationships with the company, Maclin said.
“Lost revenue has to be replaced with higher share of wallet and customer penetration,” Maclin said. “You have to get your costs and where you spend your time, to the fullest extent possible, more in line with where the opportunity is.”
JPMorgan said there is a “significant opportunity to deepen affluent relationships” and a “limited opportunity to deepen relationships” with customers who have less than $100,000 in deposits and investments, according to slides at the presentation.
“We will see banks pulling out of certain markets, looking closely at where they have market share,” said Bert Ely, an independent bank consultant based in Alexandria, Virginia. “If you shrink the customer base too much, it will kill the bottom line. You have to avoid the downward spiral where you try to drive away customers and trim customers, and you lose your better customers because they aren’t happy with what you’ve done.”
The Federal Reserve has held interest rates at record lows, putting pressure on profit margins as banks make less money from deposits. The Fed has decided to keep the rates near zero through at least late 2014.
“When you are in this interest-rate environment, retail customers aren’t generating the interest income they used to,” Ely said. “The low interest rates would have a negative impact no matter what happens with regulations.”
Bank of America
CEO Brian T. Moynihan of Bank of America Corp., the second-biggest U.S. lender by assets, has said his strategy is to broaden relationships with the lender’s 8 million so-called preferred clients that are 1.5 times as profitable as the retail group. The Charlotte, North Carolina-based company gives these customers incentives such as removing monthly service fees on checking accounts for using a Bank of America credit card, mortgage or Merrill Lynch brokerage account.
Bank of America abandoned a plan to charge some debit-card users $5 a month for the service after JPMorgan and San Francisco-based Wells Fargo & Co. decided against imposing similar fees. Citigroup Inc. and U.S. Bancorp had already rejected the idea. Maclin said JPMorgan will implement “follow-on pricing” for fees in the future.
“When the world lets us charge something more akin to your gym membership or your card, we’ll be right there with them,” he said. “In this environment, we’re just not going to rock that boat, and we have a brand and a franchise where we can make it up other ways over time.”
Regions Financial Corp., the 10th-largest U.S. bank by deposits, launched a fee-based service last year that provides customers with money transfers, bill pay services, check cashing and reloadable prepaid cards. Since the program started in July, half of the customers who have started the service were existing Regions clients and half were new, said John Owen, head of consumer services group at the Birmingham, Alabama-based lender.
“If I can start off by cashing their check or loading a prepaid card, and then move them into traditional banking, which means moving them into a savings account or checking account, that’s what I want to do,” Owen said today in a phone interview. “We’re trying to get more people into the banking system.”
Regions “would love to” take on clients shunned by larger banks, Owen said. “We’ll take all we can get in our 16-state footprint,” he said.
Maclin said it’s possible that fees for checking accounts could reach $20 one day, which he said the bank would “celebrate.”
JPMorgan’s branches are “invaluable” to its so-called affluent customers, according to the presentation slides. The company said it may open 900 “potential” new branch buildings in 2012, especially in California, Florida and Atlanta.
“Branches are not that expensive relative to all the opportunity and the other expenses that we have in running this place, given our scale,” Maclin said. “We would acknowledge with everybody else out there that it is entirely possible that they could go away one day. If they do, we will make a lot more money than we’re making right now. Until they do, we’re going to make sure we’ve got them so no one else can take our location.”