Wingspan, BankDirect Abandon Foundation of E-BankingOnline banking's promise of no fees and high interest rates has taken a hit with the news that WingspanBank.com and BankDirect will soon begin to charge fees.
WingspanBank.com defended the move as necessary to support new online features and products.
"We are launching a flurry of new features, and the best way to fund them is through these added fees," said Kevin Watters, senior vice president of marketing at WingspanBank.com, Wilmington, DE.
For example, fund-transfer capabilities from outside accounts will be available to WingspanBank customers at the end of January. In November, the company lowered the cost of online stock trades from $19.95 per trade to $9.95. The company added free ATM deposits at 30,000 ATM machines nationwide in October.
For 18-month-old BankDirect, the move to fees was motivated purely by the need to make its low-balance customers profitable.
"We looked at online customer behavior and determined that average balances are not covering operating costs," said Rose Hultgren, president of BankDirect, Dallas. "We made the move to ensure BankDirect's long-term viability on the Web."
Not only are the two banks charging, but they also are making it downright uncomfortable for customers with low balances to stick around.
BankDirect tomorrow will begin charging a $15 monthly service fee to customers who have checking accounts with balances less than $2,500 and will charge a $10 monthly service fee to money market account holders with balances less than $9,999.99. The new fee structure was posted in late December on the BankDirect Web site for its 30,000 customers.
WingspanBank in March will begin charging a $10 monthly service fee to customers with a checking account balance less than $1,500 and will charge them $6.95 per month to pay bills online. The company issued a notice last month via direct mail to its 206,000 customers alerting them to the changes.
"Online banks cannot afford to support customers with low balances in this highly competitive market," said Paul Jamieson, director of financial services at Gomez Advisors, Lincoln, MA. "In order for the banks to accelerate to profitability, they have to make these customers profitable by adding fees or they must alienate them to the point where they will leave."
Not only is the move prudent, but it probably will not result in a mass exodus of customers, according to another expert.
"The real reason people choose online banking is for account aggregation and bill paying. Once these services are set up, customers tend to not want to deal with the inconvenience of having to switch to a new provider," said Ken Kraetzer, vice president at CBSI, Harrison, NY, a financial services marketing firm. "These banks may initially lose some customers, but if they have their accounts going smoothly, they [customers] will hesitate to make a change."
Kraetzer said e-banks' no-fee business plans are not generating enough capital. He said that in order to succeed, stand-alone e-banks will have to charge fees and merge with established bricks-and-mortar banks or brokerage firms.
"Online banking traditionally offers higher interest rates and the convenience of the Internet, outweighing added fees," BankDirect's Hultgren said. She predicted that other online banks would begin to follow the path of BankDirect and WingspanBank.
Since its inception, E*Trade Bank has been charging a $5 monthly fee to consumers with less than $1,000 in their checking or savings accounts. The online bank's assets have jumped from $4.9 billion to $11 billion and its deposits have grown from $2.3 billion to $5 billion over the past year. The bank claims to have achieved this through relatively high interest rates, free online bill payment and 24-hour access to all accounts, all while charging fees.
Some are still offering no-fee banking, including NetBank, VirtualBank and USABancshares.com.
"We have been able to make money without charging fees by offering a middle-of-the-road interest rate of 5 percent," said Kenneth Tepper, president/CEO of USABancshares.com, Philadelphia. "You can't make money offering a 6.5 percent interest rate as some of our competitors are doing."
NetBank maintains that it intends to remain with its no-fee policy.
VirtualBank did not return calls about whether they are considering fees.