Navigating the evolution of fee-free business models

Innovation in financial services business models historically has taken considerable time to progress. In recent years, though, new players and new technologies have arrived on the scene creating significant change within the industry.

The financial services industry has a long history of revenue supported by fees and interest; however, in recent years, consumers are looking for fee-less options. And plenty of disruptors are offering exactly that, forcing the blue chips to follow suit to meet rising customer expectations.

No-fee banking services

Fees used to be one of the main revenue generators for many sectors in the financial services industry — monthly maintenance fees on checking accounts, minimum balance fees, foreign transaction fees, interest on cash advances, overdraft fees, ATM fees, and the list goes on.

Today, adding customer accounts can mean more to your revenue than just the fees you’d typically charge customers. In fact, fees will actively keep consumers away from your brand. There are more and more options for customers looking for no-fee options — 72% of online checking accounts are offered with no monthly fee as of August 2020.

Banks are beginning to look at value-added services to be fee-free. Online banking platform Chime offers a multitude of no-fee services to attract customers. They have no minimum balance, no overdraft fees, and no monthly service fees, among other attractive features. They recently surpassed 8 million customers.

MoneyLion, another online banking platform, offers similar fee-less services such as no hidden fees or minimum balance, free ATM withdrawal, and no-interest cash advances up to $250.

Dobot is yet another fintech brand that offers free algorithmic savings — the company automatically calculates a customer’s “safe savings amount” and moves small amounts of money into their savings account. What’s interesting to note is established bank Fifth Third acquired Dobot in May 2018 to expand the bank’s financial guidance offerings and build new customers as accounts with Dobot are held by Fifth Third.

Attracting more and more consumers who want to avoid fees can increase your deposit totals and create more money that can be issued as loans. These interest payments on the loans will make up for the fee-driven revenue you will no longer be making.

Financial services brands must take these new competitors into account and consider their path forward. You have to ask your brand a number of questions if you hope to remain competitive and not lose customers to these no-fee competitors:

  • What new features are available in the market for which your brand meets or exceeds these benchmarks?
  • Does your bank provide any of these added-value services that seem to be underutilized and could benefit from additional promotion?
  • To what extent based on your customer’s expectations could it be of interest to build, partner, or even buy smarter savings offerings? 

No-fee mortgages

Financial brands are now even getting rid of fees associated with mortgages. Fintech brands have been able to do so by developing technologies that reduce the cost of distributing a loan as well as find the best investors to buy loans.

Better Mortgage has built a new kind of business model in the mortgage space. Their technology matches investors with their borrowers’ loans — by using technology to match them, they find the best investors most interested in buying a loan and are therefore willing to pay a good price for it. Additionally, Better’s algorithm streamlines the entire mortgage process and eliminates the commission structure, thus reducing transaction costs. This structure still allows Better to both save borrowers’ money as well as make their own.

Questions to ask your brand to see if you’re keeping up with the competition:

  • What is the optimal balance between direct or indirect distribution channels to achieve your mortgage targets?
  • What manual processes currently exist within your lending business that could be automated?
  • What marketing or operational bottlenecks are making it challenging to become more cost-competitive for direct mortgage business at your bank?

Commission-free trading

The investment sector of financial services has historically relied on commissions. But now fintech brands such as Robinhood have changed expectations by offering commission-free trading.

Robinhood relies on order flow payments from market makers for the right to execute these customer trades in place of commission fees from customers. Fee-free trading, in tandem with ease of use and mobile centric experience, enables Robinhood to gain significant momentum in increasing customer sign-ups and trading volume. Robinhood’s Q2 2020 payment for order flow surpassed E*Trade and Charles Schwab combined, remarkable for a disrupter that was only recently founded in 2013, decades after its established rivals.

With new ways to invest, consumers flock to these services online for both convenience and lower costs. Traditional brokerage firms and investment banks must take these new competitors into account or risk losing their customers to these digital players.

Ask your brand and your team these questions to ensure that you are meeting the new industry benchmarks:

  • How does your bank compete and/or complement the investment offerings in the market?
  • Have inquiries for financial advisory guidance within your bank increased or decreased over the past year?
  • To what extent are inquiries converting into sign-ups compared to previous years’ performance?

With these changing business models across all sectors of the financial services industry, brands must rework their existing, traditional models to meet new industry standards. If your answers to any of the questions above uncovered that your brand doesn’t hit industry benchmarks, it’s time for your brand to invest in reworking your business model. Find new ways to offer value-added services, invest in technology that streamlines processes digitally, and move costs away from your customers to attract the most growth.