Banks Bend Over Backward for Business
Checking-account customers are traditionally reluctant to switch, but banks are fighting hard for their business.

By Terence O'Hara
Washington Post Staff Writer
Monday, January 9, 2006

Stuart Machir is 26 and in the crosshairs of every major bank in Washington.

They want his money, even though there isn't much of it. Machir estimates that his average daily checking account balance is less than $1,500 -- an amount that even five years ago would have made banks load fees on a customer considered to be a money-loser.

"I'm not exactly a private-wealth client," said Machir, who works for a downtown professional services firm.

But new technology and marketing techniques have made even marginal account-holders profitable and put people like Machir at the center of a hypercompetitive fight to sign up new customers -- particularly young ones -- no matter how skimpy their balances may be. Bank executives used to focus on savings accounts and commercial lending, but they now see consumer checking as a foundation of their business, cheaper than ever to manage and something of a loss leader for loans, investment accounts and the broad supermarket of services that banks can offer since deregulation in the 1990s. As a result, banks have focused advertising dollars, redesigned branches, extended hours, improved service and even brought back old-fashioned product giveaways in hopes of persuading decidedly unwealthy customers to do something they almost never do: switch banks.

In November, Wachovia, which has the dominant market share in the region, introduced online software to switch a customer's entire banking relationship -- including sending letters to employers to move direct deposits -- in 20 minutes or less. Several banks say they will also begin promoting such "switch kits." First Horizon Bank, a Tennessee company that entered Washington this year, will even have bank-branch employees type in the information.

Commerce Bank, a New Jersey institution that entered the local market last summer, is opening 1,000 new checking accounts a month at its three new area branches. Commerce is a big believer in an old tactic: the new-customer gift. The bank blankets neighborhoods around its new branches with direct mail, offering items such as toasters, irons, waffle-makers and golf umbrellas. Its most popular gift is the George Foreman Grill: The bank gave away 800 in its first four months in Washington.

Commerce has also gone old school in another way. While some banks refuse to accept coins, Commerce has put free coin counting machines in its lobbies, where they are available even for non-customers to exchange loose change for paper currency.

Citibank is trying to lure customers with a new rewards program, in which customers rack up points towards items like an iPod or a television set. Other competitors have fought back with advertising.

In the three months ended June 30 -- the period when Commerce began opening branches here -- Chevy Chase Bank, the largest local banking company, spent $1.9 million on local print and broadcast advertising. That was a 1,174 percent increase from the previous year's second quarter, according to tracking firm Video Monitoring Services of America LP. Wachovia, typically the most prolific bank advertiser in Washington, increased its ad spending in the second quarter by 35 percent, to $1.7 million.

Free, no-minimum-balance checking, introduced three years ago, is now the norm, and banking experts who follow the Washington market closely say a variety of so-called nuisance fees -- foreign ATM charges, overdraft fees and the like -- will be the next to disappear.

Just how effective those enticements will be is uncertain. Bank customers are among the most steadfast in the business world, even if they hate their banks, numerous surveys show. While about a quarter of all bank customers typically say they are dissatisfied, the average bank will lose only about 15 percent each year, the vast majority because customers move or die. A 2001 industry survey estimated that only 2 percent of all bank customers nationally switch their accounts for better deals on fees or rates, suggesting that few customers actually shop around.

Yet the unique dynamics of the Washington market are forcing banks to try to buck that trend. With a job base, wages and homeownership rates growing faster than in most other major metropolitan markets, Washington has become one of the steadiest sources of growth for national banks such as Wachovia, Bank of America and SunTrust. In the past five years, retail bank deposits in the Washington area have increased 70 percent to more than $100 billion, according to the Federal Deposit Insurance Corp., compared with a 49 percent increase nationwide during the same period.

Even though banks typically lose money on checking accounts with an average annual balance of $5,000 or less, the potential for growth in the area has made them willing to spend as much as several hundred dollars to lure each new customer. That customer is likely to stay an average of seven years, and, particularly in the Washington region, that means the bank can earn thousands of dollars from loans, investment accounts and other services aimed at getting a larger "share of wallet" from each accountholder.

"It's all about the checking account," Commerce Bank chief executive Vernon W. Hill II said in an interview in Washington last year. "Everything follows from there."

Yet all the branches, advertising and giveaways may be of little use unless customers are willing to do the often hard work of shopping around. Many are not.

"I've stayed because it's easy to stay," said Albert Scariato, a District resident. He said he has wanted to switch banks for two years.

Alenka Grealish, manager of the banking group at research firm Celent LLC, said banks have to be "hitting on all cylinders" to move the switching needle, especially in Washington, which has a bank branch for every 2,000 people, the highest rate in the country.

"Customers have to be really angry to switch," Grealish said. "It has to be a series of customer service failures, or getting hit with a lot of annoying fees."

The rise of online banking is making the bank-customer relationship even stickier. While less than a quarter of all bank customers use online banking, its use is increasing rapidly. As it spreads -- along with free bill payment systems and other financial relationships monitored online -- customers are even more loath to start again with another bank.

"If a customer has a fairly well-entrenched set of relationships with online banking, it gets really hard," said Kathleen Khirallah, retail banking research director at Tower Group Inc. "It's a nuisance to unwind these relationships.

Though Machir has heard and seen the offers of no-fee banking, extended hours and product giveaways, he is not sold on the need to close his Citibank account and move elsewhere. While the $80 he spends each year on fees and a few annoying service glitches make it tempting, "the time and effort it would cost to switch are not things I want to spend," he said. "For me to switch, someone would have to offer something far superior."