Hazlett on Bundling in the Banking Industry

Financial institutions bundling their services to attract customers and increase profits are following strategies tied to the economic theory on which bundling is based: price discrimination, says Professor Thomas Hazlett in a consumer finance article appearing in American Banker magazine.

Through bundling banks provide free or low-priced checking in exchange for basic services while offering premium products with additional benefits for those with greater needs.

"Everybody's going to take a different range of products, in a sense letting customers sort themselves out," explains Hazlett, adding that once a bank has established a relationship with an account holder, the bank can then "expand the relationship at a very low cost to the bank to pick up additional lines of service. "

"If banks are leveraging an existing relationship and trying to get more services and revenue because it's so efficient, the flipside of that is, if they do something that doesn't sit well with a customer," the banks stand to lose more money, Hazlett says.

Efforts to bundle services are expected to increase in the next year as banks attempt to regain revenues lost through recent new banking regulations.

Banks Revamp Checking by Watching Cable TV, American Banker, December 29, 2011. By Victoria Finkle.

"Because premium accounts tend to include at least several perks, bank also don't need to worry about which perk specifically is attracting each consumer. Some customers might choose a higher-fee account because they want free cashiers' checks while others might want free access to non-network ATMs.

"Similarly, some people buy cable for ESPN2 while others want the Food Network. Both pay the same price for access to the TV shows they want, but may end up with additional stations they will never watch.

"Of course, one key difference in banking is that consumers can often waive account fees by keeping higher amounts of money in their checking accounts or by buying additional products and services from their banks. And when consumers deepen their relationship with a bank, they are likely bringing in enough money to offset the monthly fee the bank was charging for the checking account."