Growing Non Interest Income with Fees Consumers Willingly Pay

1. Growing Non Interest Income with Fees Consumers Willingly Pay Charles Gearhart, Salin Bank Bob Giltner, Velocity Solutions, Inc. February 18, 2013

2. Contents • Introduction: Salin Bank • Fee Revenue Strategy • Fees Consumers Willing Pay • Conclusion

3. Introduction • Salin Bank is a $850 Million Bank in Indianapolis, IN • 24 Branch Locations • 30,000 Checking Accounts • $4.1 MM in Service Charges on Deposits • Key Service Charge Revenue Strategies: • Implemented Dynamic NSF/OD Limits • Implement Targeted Debit Use Incentives • Aggressive Acquisition and Referral Program • 2013: Considering Tiered NSF Fees and Small Dollar Loans

4. Fee revenues on transaction account activity are up nearly 15%! ….but not at banks. 2008 2012 $82B $70B Billions $48B $44B FDIC Service Charges on Deposits FDIC Service Charges on Deposits FIs FIs, PayPal, Billers, Others Source: FDIC, Our Analysis; Banks and CUs Fee Revenue Strategy

5. Revenue Strategy Fee Revenue Strategy We would be well-served to understand revenue growth from both FI and non-bank perspectives. Action Plan 1. Target fees according to consumer willingness topay for what they value. 1. Grow overdraft revenue through improved service and segmentation. 2. Grow usage revenue by enhancing transaction context and experience. • Use similar tools to penetrate the market of similar size for payment liquidity services. 3. Make account acquisition revenue as important as current account revenue. 3. Add revenue with debit use, and premium services providing contextual value.

6. FI Maintenance Fees How much do you pay in monthly check fees? - Nothing 69% - $3 or less 14% - > $3 17% Source: ABA/Ipsos 2012 Study Fee Revenue Strategy The key revenue sources, for financial institutions and non banks, are overdraft and “payment liquidity” service fees rather than monthly account fees. 2012 $56B $82B Key Sources Billions $29 B Payment Liquidity Non Bank $38B $44B FDIC Service Charges on Deposits $27 B NSF/OD Bank FIs FIs, PayPal, Billers, Others Source: FDIC, Our Analysis

7. Deposit Growth Source: FDIC Fee Revenue Strategy Consumer response is well-documented and has been unequivocal in shifting away from maintenance fee-based banks. 7

8. Fee Revenue Strategy Consumers wanting more assured methods of covering shortfalls find paying biller late fees more attractive. The Biller Late Fee Market $56B NSF/OD $27B Source: Our Analysis Census Data, FRB Boston Payments Study

9. Fee Revenue Strategy Nearly 30% of households pay bills late, and half of those pay 10+ bills late a year. In the past 12 months, did you pay a bill after the due date or miss a payment?

10. Fee Revenue Strategy FIs need to segment and understand the needs of checking account holders for liquidity services, and deliver a superior alternative to payday lending. Average overdraft is $60 and average 12 items a year ($720) @ $31/item = $372 ($52 per $100) $56B 871 Million NSFs (25% of Accts) x $31 = $27B NSF 27B Average bill is $95 and average 10 items a year ($950) @ $16/item = $160 ($16 per $100) 1.4 Billion late payments (28% of HHs) x $16 = $22B Average cost of a payday loan of $250 x 8 per year ($2,000) @ $37 = $296 ($15 per $100) 186 Million payday loans (13% of HHs) x $37 = $7B

11. Fee Revenue Strategy Non-bank “payments” competitors like PayPal’s Billfloat are segmenting the largest industry revenue source with depositrisk management.

12. …to multiple products, sizes and prices. Fee Revenue Strategy Financial institutions must shift from providing one service delivered in one way at one price. We need to move from one standard product at one price…

13. Fee Revenue Strategy • CFPB and Regulatory Summary • Regulatory interests can be defined: • CFPB – Emerging for large FIs (payment order, misleading or unfair practices, mistreating low income or young) • “Appropriate action should be taken to address any risks that are identified including excessive usage, disproportionate impact and nonperformance, such as … adjusting credit terms, fees or limits….” • Set overdraft limits appropriately and justifiably. • Document information for regulators showing who the heavy users of overdraft services are and their preferences.

14. Fees Consumers Willingly Pay: Overdraft and Liquidity Services Users of overdraft and liquidity services have different needs and service desires. Your Service Consumer Need Sample Bank 10+ overdrafts fee users pay $1,100 a year in fees; 7% of accounts; want items paid; low per item price sensitivity. Heavy NSFer Only OK Service 1-3 items a year pay $60 a year in fees,12% of accounts; may opt out; high per item price sensitivity. Rare NSFer Poor Service No Service Non NSF Liquidity Borrower 20% of accounts; opt out; low credit score; focus on alternatives to OD. 30%

15. Fees Consumers Willingly Pay: Overdraft and Liquidity Services • Dynamic limit management, based on deposit activity, improves regulatory compliance, customer service and revenue, recapturing debit declines. Sample Regional FI with Deposit Tracking Community FI

16. Fees Consumers Willingly Pay: Overdraft and Liquidity Services With improved limit and service management, tiered NSF in use since 2008 provides better service and more revenue. Tiered NSF Fee Structure “Many banks adopt tiered NSF fee rate structure.” Wall Street Journal, November 12, 2008 • Community FIs with Tiered Fee Structures • MainSource Bank, Greensburg, IN • Landmark National Bank, Manhattan, KS • First Federal Savings Bank, Elizabethtown, KY

17. Fees Consumers Willingly Pay: Overdraft and Liquidity Services For example, one community bank charging $32 per item lowered prices for nearly 70%of its accounts presenting NSFs and increased revenue 16%. Tiered Pricing Example

18. Fees Consumers Willingly Pay: Overdraft and Liquidity Services Why is it that we will provide a $700 overdraft limit to a customer where we would not provide a $700 line of credit? • Overdraft services are underwritten based on deposit activity and right of offset. • Low APR lines of credit have not been profitable. How could this combination be re-priced?

19. Fees Consumers Willingly Pay: Overdraft and Liquidity Services • Used deposit scoring to underwrite small loans. • Reg. Z excludes “participation or membership fees” from interest • Fee-based checking service: • Earn triple rewards • Cash back offers • worth hundreds $$ • Automated small dollar • loans for 1.25% for 30 days 19 Some FIs are providing small dollar loans with low APRs and maintenance fee pricing via automated websites.

20. Fees Consumers Willingly Pay: Usage and Premium Services The most significant opportunity in the near term is to improve and “own” the relationships we already have.

21. The key to revenue growth is to have actively-engaged transaction accounts. The debit card is the single best indicator of engaged transaction accounts. Fees Consumers Willingly Pay: Usage and Premium Services

22. …and getting them to swipe with you drives revenue. Increasing swipes among non and light card holders adds $56/yr per responding account. Fees Consumers Willingly Pay: Usage and Premium Services Your highest return opportunity is “onboarding” existing accounts so you are their primary financial institution which increases revenue and relationships per account. Nearly half of your accounts are non debit swipers or light users and swiping elsewhere… Source: Velocity Solutions Sample Client Analysis

23. Examples: Wine with dinner Fees Consumers Willingly Pay: Usage and Premium Services What are new revenue sources consumers are willing to pay for added contextual value. • Contextual Drivers • Location • Timing • Information • Simplicity • Revenue Sources: • Service Fees • Third Party • Revenues • (network effects) • Overdraft services • Popcorn at a theater

24. Premium Service Pricing Fees Consumers Willingly Pay: Usage and Premium Services Introduce contextual value through premium services that can be added to any account. • Overdraft revenue is an example • of successful contextual revenue • Characteristics are: • Can be added to any account • Consumer action drives • revenue • Majority forego service • Willing users drive revenue

25. Fees Consumers Willingly Pay: Usage and Premium Services For example, you can easily ride the growth in prepaid by simply re-configuring a checking account. 80% of Prepaid Card Users Have a Checking Account • Over a checking account configured like a GPR Prepaid Card: • Prepaid Check Card • $5.95 a month • No overdraft fees ever • Load with online banking, ATM deposits

26. M&T Bank Offers Credit Score and Online Banking for $2/mo. Zions Bank: Three Levels of Online Banking United Community Bank Offers PFM for $2/mo. Mercantile Bank of Michigan has 30% Sign Up for $4/month “Positive Pay” View. Banco Popular Offers $25 Premium Rewards Debit Card CommunityONE Offers Premium ID Theft $15/mo. Oregon Employees CU Offers Doxo Online Filing Cabinet. Fees Consumers Willingly Pay: Usage and Premium Services Below are examples of how FIs are implementing contextual value strategies to drive premium service revenue.

27. Scan & Pay Fees Consumers Willingly Pay: Usage and Premium Services • And so are a lot of non-FI competitors…

28. 33% of Volume 2012 ACH (25%) Online (7%) Mobile (1%) $ $ Information Risk Transacting Planning Acct Contextual Value • FI Checking Acct • Revenue • Relationship • Risk • Regulatory • Compliance (ID) $ $ $ Fees Consumers Willingly Pay: Usage and Premium Services • The Internet, electronic payments and information network are moving contextual value, revenue and relationship management to competitors outside the FI checking account. Payment Networks: (PayPal, Google, Dwolla) Aggregators (BillFloat, PinPoint, Mint, BillMyParents, Banno) Bank Routing # & Account # Debit Card # Online User Name/Password Merchants (Walmart, Target, Home Depot) Billers and Services (Online/Phone Payment; Manilla, Doxo, Volly) Telephone (Isis, Boku, Verizon, AT&T)

29. This is the most significant impact of “mobile” growth: it vastly increases the contextual value of networked information that can occur outside the “account.” • Contextual Value Drivers • Location • Timing • Information • Simplicity Fees Consumers Willingly Pay: Usage and Premium Services 10 Times Growth Source: The Economist

30. Project of Merchant Marketing Revenue Aite Group Merchant Revenue Projection Source: Aite Group, 2011 Fees Consumers Willingly Pay: Usage and Premium Services Many are targeting transaction information that creates FI revenue through merchant advertising revenue. Some predict revenue as high as $35 per all accounts. Firms Targeting Merchant Marketing Revenue

31. Will Debit Continue to Lead In-Store Payments? Fees Consumers Willingly Pay: Usage and Premium Services FIs are under attack by competitors providing networked contextual value, stealing revenue from our “accounts.” Don’t lose your debit dominance. “In-store payments are PayPal’s to lose…” Don Kingsborough, PayPal

32. Winning Trends Conclusion We would be well-served to understand revenue growth from both FI and non-bank perspectives. Action Plan 1. Target fees according to consumer willingness topay for what they value 1. Grow overdraft and payment through improved service and segmentation. 2. Grow usage by enhancing transaction context and experience. • Use similar tools to penetrate the market of similar size for payment liquidity services. 3. Make account acquisition revenue as important as current account revenue. 3. Add revenue with debit use, and premium services providing contextual value.

33. Conclusion • Salin Bank is a $850 Million Bank in Indianapolis, IN • 24 Branch Locations • 30,000 Checking Accounts • $4.1 MM in Service Charges on Deposits • Key Service Charge Revenue Strategies: • Implemented Dynamic NSF/OD Limits • Implement Targeted Debit Use Incentives • Aggressive Acquisition and Referral Program • 2013: Considering Tiered NSF Fees and Small Dollar Loans