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Banks trading fees for loyalty

Some banks are doing away with profitable fee structures in order to foster customer loyalty by adjusting them based on customer value.

The latest marketing campaigns from TD Waterhouse and WashingtonMutual have nothing to do with loyalty rewards, interest rates, or new branch locations. In fact, they have everything to do with something they are not doing: charging ATM withdrawal fees.

Giving up on fees of any kind is not easy for the banking industry. According to a 2004 report from the Federal Reserve, income from non-interest revenue streams now provides nearly half of all operating income generated by U.S. commercial banks. Non-interest revenues basically are fees. They come from checking accounts, ATMs, savings accounts, and credit card accounts. Fee income has more than doubled as a share of commercial bank operating income since the early 1980s.

The banking industry is not alone with its reliance on customer service fees. Tacking on fees for transactions and services has long been a profitable province for many businesses. Travel companies are among the worst offenders with fees for everything from rental car fuel surcharges to rescheduling fees for airlines. But banks are starting to understand the effect fees have on customers. They are starting to adjust their fees based on customer value. They're even getting rid of some fees in the interest of customer retention.

ATM fees are the focus of most customer wrath. Go to for evidence. But fees for checking, overdrafts, credit cards, loan origination, mortgage closings, and more are under scrutiny. Those fees may be affecting how customers perceive their banks, and that perception is not good. A recent Forrester Research study on customer advocacy found that the biggest retail banks have subpar customer advocacy ratings. When the research firm asked more than 60,000 customers if they believed "their bank acted with their best interest in mind," Citibank and JP Morgan Chase received positive responses from less than 20 % of their customers. The highest rated retail bank was Wachovia at 40%. In a separate study, Forrester found that 65% of all customers who had been hit for an overdraft fee at any point during their tenure with their bank had a negative view of their bank.

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E-Loan, winner of the "most trusted financial services firm" in the most recent TRUSTe survey, guarantees customers that all fees will be disclosed upfront and will not change at any time during the loan process. Vanguard uses a sliding scale for fees it charges for everything from investment advice to brokerage commissions. The fees depend on the total amount of assets and the length of time the customer has been a Vanguard investor. CMO Sean Hagerty said he has had "absolutely no negative feedback" about that structure from those who benefit from lower fees, as well as from the customers who have to pay higher fees.

"Lower fees are part of the economies of scale for us," he said. "If you're a customer who has long-term investments with us, we're not going to charge a lot of fees."

The "most valuable customer" practice is actually finding its way into many banks. One way to avoid ATM fees, or any fees for that matter, at Citibank, First Fed, ING, or HSBC is to open a money market account with them. Money market customers have all fees waived at these banks. In fact at ING, if you tell a friend about that feature, it will reward you $10.

"Banks will eventually have to stop charging so many fees," said Gregg Freishtat, CEO of financial service e-commerce provider Proficient. "Right now they charge so many fees because it's just entirely too easy for them to do it, and they make too much money from it."

Reprinted with permission from 1to1 Media. (c) 2006 Carlson Marketing Worldwide."

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