It was only a few months ago when Netflix (NASDAQ:NFLX) announced price hikes which raised prices by up to 60% on their customers. In just over two months, Netflix has lost nearly two-thirds of its share price from that one simple move. Click to enlarge
Many customers are jumping ship and will likely test the waters on Hulu, Redbox (NASDAQ:CSTR), and Amazon (NASDAQ:AMZN). Many will likely find their services to be a fair trade off for what they were getting with Netflix. The market realizes this and has sold off appropriately. Some people have taken the opportunity to compare the Netflix $6 ‘fee’ if you will, to the new fees banks are introducing. This couldn’t be farther from the truth, and here’s why:
Bank of America (NYSE:BAC) and Citigroup (NYSE:C) are two of the first banks to introduce more fees for what have become standard services. The new fees are how banks are making up for the lost revenue from the fee change on debit card swipes. BofA has decided to target debit card users to make up for the fees. With this decision BofA risks customers leaving in search of greener pastures or simply using their card for ATM withdrawals and paying in cash. Using the card only in this way will avoid the $5 monthly charge for customers.
Citi decided to play the fee much, much worse. Citi found people (surprise, surprise!) did not want to pay for debit card use, so they are instead placing charges on checking accounts. The difference between what BofA and Citi did is enormous. It’s easy to avoid using a debit card through any number of different means, but to avoid the checking account fee, you need to maintain a fairly large balance. Overdrafting alone has been a problem for people, how are they now expected to suddenly increase balance by thousands of dollars? While you can maneuver around debit card use, having a checking account is a virtual necessity.
At first glance, it only seems logical that customers will leave banks in droves just as they left Netflix. It is true that some will leave, but don’t count on the numbers to be anywhere close to Netflix for these two reasons:
Interconnectedness: With Netflix, you are always only a phone call away from severing your commitment to the company. In other words, there is no commitment. With banks, people have far reaching ties across the internet. Your PayPal (NASDAQ:EBAY) account, direct deposit, automatic bill payments, and any online banks all need to go through somewhere. The hassle of redirecting twenty different bank ties will not be worth switching banks for many people. I wouldn’t be surprised if some people choose to get a debit card with a different bank, but I don’t see a large number of people severing ties completely with BofA.
Citi is a tougher sell. If you can’t make the minimum account balance, your only two choices are leave the bank or pay the fee. I can see more people leaving Citi for this reason, but the amount people are interconnected with various services will keep them locked in for longer than they may like. Citi should experience more customer loss than BofA, but it will like be slow and steady, unlike the mass exodus at Netflix.
Customer Age: Generally speaking, Netflix has younger, smarter, more robust customers - a new generation, if you will, of bargain hunting, tech savvy, individuals. A lot of their customers have lived and breathed the internet for most of their lives, they know when a deal has gone bad and aren’t afraid to shop around for the next best thing. BofA and Citi have their fair share of these folks as well, but they also have two generations of retirees who only possess basic knowledge of the internet. These people prefer to drive down to the local branch or call support to take care of their banking needs. To suddenly ask them to shut down everything they built with their bank and go somewhere new is nightmare scenario for them. They feel safe and comfortable where they are at and will pay for it with the higher fees.
In conclusion, I believe banks who introduce new fees will lose customers, but don’t expect any kind of serious exodus like at Netflix. I expect banks to target conveniences that can be avoided, like the debit card. In this way, the fees will truly be optional. Those that wish to take the services can, while those that don’t want to pay the fee can avoid it, while also keeping their bank. I don’t believe Citi will fare as well with the unavoidable fee. It will likely lose low income customers at a constant rate for as long as the fees last on these larger minimum balances. I also believe neither bank will generate the kind of income it expects from these new fees, so don’t be surprised if they add more fees to other services to make up the difference.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.