The Evolution of Online Checking

Navigator Edition: September 2014
By: Mike Kovalchick and Frank Verhaegen

In the wake of the Durbin Amendment and Regulation E of the Electronic Funds Transfer Act, many banks were pleasantly surprised that the debit interchange cap and regulation of overdraft fees did not entirely eliminate profitability from debit and checking products. In continued efforts to maximize the profitability of these offerings, banks confirmed that customer behaviors enabled through online and mobile banking provide greater returns, and are actively pursuing the segment. “Self-service” customers – customers who solely use online and mobile banking and forgo more traditional and expensive customer service channels such as branch tellers and call centers – are identified as particularly profitable customers relative to their counterparts. To encourage customers to adopt self-service behaviors, some banks have created or augmented “self-service checking account” offerings that steer users to online and mobile and either do not provide or charge a fee for usage of more expensive customer service channels. Unlike legacy “free checking” accounts with limited features, the self-service checking accounts are truly fee-free and offer enhanced benefits.

Figure 1: Illustrative ‘Self-Serve’ vs. ‘Traditional’ Checking Account OfferingsFig-1_-Illustrative-Self-Serve-vs1 Assumes national consumer average checking balance of $3,800.
Source: Bank websites, First Annapolis Consulting analysis.

To further encourage adoption of the products, many self-service checking accounts offer some form of interest on deposits or even a transactional rewards program. The goal of these programs is to augment customer loyalty to the brand and product, thereby increasing transactional usage of the product, which in turn results in incremental profitability for the bank. Rewards vary widely by product: the Discover Cashback checking account, currently offered only to Discover credit cardholders,1 generates 10¢ per debit, ATM, or bill pay transaction; the UFB Direct Airlines Rewards account earns points based on debit spend redeemable for airline miles; the Capital One 360 checking account offers a signup bonus of $50 with three debit card purchases within 45 days of account opening; the PNC Virtual Wallet account increases the interest rate on the linked savings account with more than six debit purchases monthly; in addition, numerous self-service checking accounts offer a modicum of interest on the core checking account as their primary incentive. All of these promotions help sway customers towards procuring a self-service checking account; however these incentive structures bifurcate self-service checking account customers into two strategic value plays for banks. The first encourages debit and other transactional activity, capitalizing primarily on interchange revenue. The second stimulates balance growth, generating attractive net interest margin given their lower-cost delivery. Regardless of strategy, the low-cost associated with self-service checking accounts ensures that profit margins are maximized.

Figure 2: Illustrative ‘Self-Serve’ Checking Account Features

1 Discover Cashback Checking is expected to be available to the general public regardless of a Discover credit card relationship during 2014.
2 Amex Bluebird users can utilize P2P payments to other Amex Bluebird users but not external accounts.
3 PNC Virtual Wallet is created with a linked savings account that earns interest.
4 Capital One 360’s Automatic Overdraft Coverage serves essentially as a line of credit for all checking account customers.
5 “Enhanced Benefits” refers to concierge service, purchase protection, ID theft assistance, roadside assistance, and other ancillary member benefits.
Source: Bank websites, First Annapolis Consulting analysis.

The shortcoming of self-service checking accounts, as the name may suggest, is a potential lack of customer service associated with the offering. In fact, many of the banks associated with self-service accounts have little or no physical branch presence. The accounts are marketed towards users that are less reliant on traditional customer service channels in the first place; such targeting helps ensure that account costs are low, enabling banks to offer more compelling value propositions on the account.

The increasing prevalence of self-service checking accounts is a definitive win for all stakeholders involved. Through the product’s growth, self-service account issuers are either increasing per account profitability by converting existing customers to online accounts or winning market share from shrinking (both in physical size as well as number) brick and mortar banks. From the customer’s perspective, the enticing features, benefits, and overall value accompanying self-service checking accounts are attractive enough to lure many consumers to migrate their balances. Banks offering traditional checking accounts will likely need to re-evaluate their product strategy to compete against these new account offerings.

1 Discover Cashback Checking is expected to be available to the general public regardless of a Discover credit card relationship during 2014.

For more information, please contact Mike Kovalchick, Director of Implementation Services,; or Frank Verhaegen, Associate, frank.verhaegen Both are members of the Deposit Access Practice, specializing in Debit and Prepaid.

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