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Free Banking Isn't Free: How Do Banks Use Pricing to Influence Your Behavior?

Financial services companies have become very sophisticated at using pricing to influence consumer behaviour. Often, they’ll hide their true costs whilst giving the impression that they offer value for money.

Banks know that for most people banking is a low-interest category and this fact is widely exploited in their marketing. However, they have also learnt that people's expectations are that banking is free, and when they have tried to charge upfront customers really, really don’t like it [as Bank of America found back in 2011 when they introduced a $5 per month fee]. So, instead, they’ve learnt to camouflage their fees in various ways.

Here are some of the main ways that financial services companies use pricing to influence consumer behaviour.  We want to help you make informed decisions about how and where you bank.

The tl;dr version up front:

  • “Free Banking” is never free
  • Beware headline claims (you need to read the small print and remember: if it's difficult to understand that is by design)
  • Fees are not always bad — they can in fact lead to better outcomes for consumers

There are 4 main ways banks use pricing: 

  1. Hidden costs
  2. Subscriptions
  3. Headlines rates!
  4. Filtering


Hidden Costs

This is the most widely adopted pricing mechanism in the market — it's a cost that is transformed into a consumer benefit through the magic of marketing. This is typically expressed as “Free Banking” and generally means you get low/no interest on your deposits. What feels like a great deal is actually just clever repackaging by the banks — in reality, your deposits are an interest-free loan you're giving the bank. If they are a lending institution in their own right, it allows them to lend that money out at interest rates up to and beyond 24%, giving you back nothing or next to nothing.

If your bank is leading its marketing efforts with “Free” (most typically new digital banks) or if you have no idea what your interest rate is because your Big Brand Bank takes no effort to inform you, this is most likely the category you fall into. There are over $13bn held in deposits in the US, over 80% of which are with Big Brand Banks — those deposits are almost all earning 0.01%.

Given that the Big Brand Banks are some of the most profitable businesses in the country, you might want to ask yourself: if they are free, who is footing the bill? The answer is: you.


Subscriptions

This is an upfront and explicit form of pricing that is becoming increasingly popular with many online fintech services, especially those offering investment services. The general form the subscription model takes is a low, medium and high option for different levels of service. Some examples are below:


These fees are a direct source of revenue and mean every account is at least paying something towards costs. It is expensive to open and maintain accounts and it's not unusual for 50% or more of these to quickly become inactive. This means that your best/most active customers are essentially subsidizing your worst/inactive customers. Having subscription fees helps reduce the proportion of inactive accounts and guarantees a revenue stream from every account.

The downside of these fees is that they can become costly for the consumer and can add up, especially if the total funds in the portfolio are low.


Headline Rates!

Financial services marketing has evolved to the point where it is almost exclusively focused on account acquisition. Banks and Financial Institutions will pay well for new accounts and hundreds of dollars are paid in commission to websites like Nerdwallet, Credit Karma, Credit Sesame and The Points Guy for each new account. Whilst these sites profess to be independent of the companies who pay them — buyer beware. Headline rates also make it easier for these aggregator sites to promote their client companies.

It’s not unusual for a company to spend several thousand dollars to acquire an affluent customer: in marketing costs, incentives and affiliate fees. Someone has to pay for all this largesse and that person is you. 

So, how do they subsidize these costs? What they give in headline rates, they take in low returns; it’s nearly impossible to actually receive the headline rate. This is often termed gamification in the industry and the idea on the surface is to make it fun and engaging and to “reward” good behaviour. But the real reason to turn wealth-building into an RPG is to make the economics work for the bank. The difference between what is promised and what is delivered is termed breakage.  

The problem with this model is that it relies on giving the false impression to the customer that they can achieve the headline rate or offer. The reality is that whilst some may put the time and effort into achieving it statistically, most will not (otherwise the company could not afford it). For every customer that “wins,” many hundreds do not — and those many hundreds are effectively paying for the one person who does manage to “game” the system.

If you think an offer looks too good to be true then it probably is.


Filtering

In mass retail banking, this is often an activity-based fee (e.g. you need to use your debit card X times or have min. direct deposits or deposits in the account or you get charged an account fee).

More prevalent in private banking is the use of minimum deposit thresholds and/or minimum monthly direct deposits.

These fees are not revenue lines as such — instead, they create a filter to minimise the amount of inactive accounts (to eliminate the costs of these inactive accounts which are indirectly paid by active consumers). In private banking, filtering is used to ensure that only those customers who fit the target profile for which the service has been designed actually take up the account and to inhibit those for whom it is not designed.


Unifimoney and Fees

Unifimoney is a full-service digital private banking service and acts as an alternative to those considering traditional premium banking or private banks like CitiGold, Chase Sapphire Reserve and BoA Private Client.

Similar to these services, Unifimoney does not charge monthly account fees as long as minimum direct deposits are made or minimum deposits held in the account. For Unifimoney, the threshold is $6k per month direct deposit or balance of over $35k are maintained. Accounts not meeting this threshold are charged $10 a month.

These fees are a filtering mechanism to reduce inactive accounts and ensure that inactive customers are not being subsidised by our best customers. By keeping unnecessary and inefficient costs like inactive accounts low, Unifimoney can afford to give more back to its active customers. We think this model is fairer for all — we want to set an example of transparency, showing that fees are not always bad for consumers. In fact, in banking, they’re usually a sign that your account is working for you.

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