Customers frustrated by banks’ controversial new fees are finding out what industry insiders have known for years: it is not so easy to disentangle your life from your bank.
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The Internet banking services that have been sold to customers as conveniences, like online bill paying, also serve as powerful tethers that keep customers from jumping to another institution.
Tedd Speck, a 49-year-old market researcher in Kent, Conn., was furious about Bank of America’s planned $5 monthly fee for debit card use.
But he is staying put after being overwhelmed by the inconvenience of moving dozens of online bill paying arrangements to another bank.
“I’m really annoyed,” he said, “but someone at Bank of America made that calculation and they made it right.”
Former bankers and market researchers say that it’s no accident.
The steady expansion of online bill paying, they say, has emboldened Bank of America , as well as rivals like Wells Fargo, JPMorgan Chase and SunTrust, to turn to new fees on customer accounts as other sources of revenue dry up. The fees have caused an uproar among consumers and drawn sharp criticism from politicians, including President Obama.
“The technology locks you in and they’re keenly aware of it,” said Robert Smith, who was chief executive of Security Pacific when it was bought by Bank of America in 1992. “It’s very hard for consumers to just ditch that.”
For years, banks have openly sought to attach as many loans and services as they can to a customer, like credit cards, mortgages and mobile phone banking.
What they haven’t mentioned are marketing studies like the one commissioned by Fiserv, which develops online bill paying systems, showing that using the Internet to pay bills, do automatic deductions and send electronic checks reduced customer turnover for banks by up to 95 percent in some cases.
With 44 million households having used the Internet to pay a bill in the past 30 days — up from 32 million five years ago and projected to reach 55 million by 2016 — it’s a shift that has major ramifications for competition.
There’s even evidence that fewer consumers are switching banks, with 7 percent of them estimated to be moving their primary account to a different institution in 2011, down from 12 percent last year, according to surveys by Javelin Strategy and Research.
Emmett Higdon, a consultant who managed Citibank’s online bill payment product from 2004 to 2007, said that “for the consumer, it’s a double-edged sword.” While customers value the convenience, inside the industry “it was known that it would be a powerful retention tool. That’s why online bill paying went free in the first place. Inertia is powerful in the banking industry.”
Bank of America today has 29 million account holders banking online and 15 million using the service to pay bills, but company officials say there is no connection between the stickiness of Internet bill paying and the decision to impose the $5 monthly debit card fee.
“People like online bill pay, it’s convenient and safe,” said Anne Pace, a spokeswoman for the company. “The lower attrition rate that came along with it was simply a result of offering a valuable service.”
The fee, she said, “allows us to continue offering the benefits that customers have come to expect from our debit card,” like fraud protection, overdraft prevention and a wide-reaching A.T.M. network.
Asked if the bank calculated how many online-bill-pay customers a new fee could drive away, Ms. Pace said, “We did extensive research on how they would react to a new fee and whether it was fair.”
The new fee will not apply to customers with a Bank of America mortgage or those who have an account balance of $20,000 or more.
Members of Congress have taken notice of the fee uproar — and the ties that bind customers to their banks.
“The difficulty of moving accounts is deliberate and unnecessary,” said Representative Brad Miller, who introduced a bill this month that would make it easier for customers to switch.
“If you decide another bank is better, you should be able to change, just like you’d take your business from Wal-Mart to Target,” said Mr. Miller, a Democrat from North Carolina who is a member of the House Financial Services Committee.
Mr. Miller’s bill reflects a rising anger centered on Bank of America’s proposed debit card fee, which the bank plans to impose in 2012, and similar charges under consideration by other financial institutions.
On Thursday, Democratic lawmakers asked the Justice Department to investigate whether the banks had colluded in setting the fees.
The Occupy Wall Street protestersin Lower Manhattan have also jumped on the debit card fee as one more example of corporate greed. And activists are calling on account holders to switch to nonprofit credit unions en masse on Nov. 5, which they have named Bank Transfer Day; a Facebook page devoted to the effort has drawn more than 38,000 supporters.
As a result, the question of whether consumers will indeed vote with their feet is being closely watched by the banking industry, consumer advocates and legislators. The banks don’t release detailed data on customer defections.
“There’s a certain amount of pain you can inflict on customers without losing them and the banks are all doing careful calculations about what customers are willing to pay for,” said Mark Schwanhausser, a senior analyst with Javelin. Just as airline passengers swallowed fees to check bags, he predicts, many consumers will stay put because of the difficulty associated with changing and because they genuinely like the banks’ online services.
To be sure, holding on to customers is the goal of every business. The distinction in this case, critics say, is that a product that was marketed to customers as a convenience is now being used against them. “If they were only offering a service, that’s one thing,” said Ed Mierzwinski, consumer program director of U.S. Pirg, a nonprofit consumer advocacy group. But banks, he said, consciously make it harder to switch “in order to make their customers sticky.”
Customer satisfaction, rather than the annoyance factor, is what makes consumers reluctant to switch, according to the banks and the companies that develop Internet banking technology.
“I disagree with the notion that the consumer is a victim in all of this,” said Eric Leiserson, senior research analyst with Fiserv, which counts Bank of America among its customers. “These services were developed to bring convenience to consumers. It’s a win for all.”
Studies commissioned by Fiserv using data from SunTrust and Wachovia in 2007 and 2008 emphasize how online banking and e-bills reduce customer turnover while substantially raising profits per customer.
“For many consumer banks, actively lowering customer attrition rates is one of the most important strategic imperatives for the bank as a whole,” one survey concluded. “The results of this study suggest clearly that offering and aggressively marketing e-bill to the bank’s customers could be a highly productive and effective strategy.”
But while keeping customers happy is critical, just as important is keeping them captive.
“The name of the game is to find the levers that increase customer loyalty and retention at a reasonable cost,” said Kirk Gripenstraw, an expert on customer analytics who worked on the Fiserv studies.
The 2008 study showed that customers who made five or more payments online a month were 95 percent less likely “to churn,” while consumers who didn’t bank online were 43 percent more likely to leave.
Current marketing material from First Data, another e-commerce and payment processing giant, describes online bill paying as “one of the ‘stickiest’ Web applications.” Most important, First Data concludes, electronic bill paying builds greater loyalty “because you have drawn your user closer.”
Like Mr. Speck, Adam Zaharchuk of Gilbert, Ariz., is upset about the fee, but he also concedes he’s too tied in to leave Bank of America. He has started paying bills via his iPhone — using one of the mobile banking apps that insiders say could prove to be among the stickiest yet. “They’re nickeling and diming the little guys out there,” he said. “But it’s very convenient.”