Service Fee Banking and Financial Transparency

Introduction: The Case for Service Fee Banking

The service fee banking model is the most appealing approach to consumer banking, and it is a model that is long overdue. A quick review of Regulation CC, Availability of Funds and Collection of Checks, suggests that financial institutions have more leeway in customer transactions than is appropriate. Moreover, Regulation CC, while perhaps appropriately structured, is poorly implemented. The regulation is designed to protect financial institutions from unnecessary risk generated by individual banking customers. On a customer-to-customer basis, the risk management provisions seem excessive; it is only when one considers the absolute numbers of transactions that could fall into the Regulation CC categories that the potential risk becomes apparent.

The primary requirements of Regulation CC are twofold: first, to make customers' funds available for withdrawal within prescribed times, and second, to provide funds availability disclosures to customers. The primary objectives of financial institutions, by contrast, appear to be protecting their operations against unnecessary risk and maintaining a reliable and lucrative revenue stream. Given that the terms of Regulation CC are vulnerable to subjective interpretation by financial institutions, there appears to be considerable opportunity for slippage—for banks to prioritize profit margins and shareholder interests over customer service.

Regulation CC and Implementation Concerns

The service fee banking structure is preferable, primarily because it can be provided with considerable transparency. Fee schedules can show precisely what a customer is buying and how much they are paying for services. Service fee structures can reflect the actual frequencies at which customers use each type of service, and customers can see how the fees are proportional to the value of the service they are buying. This model, relatively new and referred to as an unbundled pricing model, means that customers only pay for the banking services they actually use.

The Appeal of Unbundled Pricing Models

A Deloitte survey conducted research on customer preferences for banking service models (Zein et al., 2013). Roughly half of the customers surveyed expressed a preference for the fee-per-service model over other banking service options, including the standard monthly service fee model and tiered usage plans (Zein et al., 2013). One attraction of the fee-for-service model is that pricing can be structured so that high-frequency users are not penalized when fees are scheduled with volume breaks (Zein et al., 2013). The fee-for-service model stands in stark contrast to the currently popular integrated services model used by retail banks, which allows banks to offer an entire constellation of services for free under one monthly fee, provided customers meet certain fee waiver criteria such as maintaining a particular account balance (Zein et al., 2013).

Beyond concerns about monthly banking fees lies a more significant issue: ensuring that banking institutions clearly understand that the more self-service channels they provide to customers, the more support and resources they need to direct toward keeping those services functioning optimally and securely. Digital banking technology systems are susceptible to cyberattacks, even by hackers using rudimentary tools. The al-Qassam group, for instance, recently said that it had suspended attacks on American financial institutions but might reinstate them in the future (White, 2013). Moreover, there are sufficient examples of banking digital technology failures absent any malicious intent to warrant caution—perhaps even greater hesitancy from small depositors.

Cybersecurity and Risk Management in Digital Banking

Technological innovation must be balanced with risk management. It is simply not acceptable for financial institutions to expect customers to accept repeated failures in digital infrastructure without adequate security procedures. The risk of becoming collateral damage to a failed financial infrastructure due to inadequate cybersecurity is unacceptable. Financial institutions must prioritize security alongside innovation.