Can ‘Elective’ Fees Work For Retail Banks?

Most people like their banks, a built-in advantage for banks and credit unions as they fend off challenges from upstarts, and as more and more financial services get the mobile touch. Indeed, some 88 percent of consumers don’t see a reason to switch to other financial institutions, according to a recent PYMNTS Where We Will Bank Study. It also found that nearly 91 percent of consumers say their primary financial institutions meet their needs.

That underscores the difficulty faced by new entrants into this competitive world.

It’s not that people don’t look at other offers, or even try them out for certain use cases at certain times, but making a wholesale move from one bank to another comes with switching costs that many consumers would rather avoid.

But that’s not stopping efforts at innovation and disruption in this space.

Aspiration is one of those innovators hoping to gain socially-conscious consumers via a pay-what-you-like fee structure — while also managing to please investors at the same time. In a new PYMNTS interview, Andrei Cherny, CEO at Aspiration, shares with Karen Webster his experience in building this new retail banking concept over the last four years.

“What we’ve really done is create this category of socially conscious, sustainable retail banking that really didn’t exist before,” Cherny said. “We set out to build a financial firm around a sense of purpose.”

Aspiration, which counts 1.5 million customers, has one major purpose: to make banking services available at no cost for its customers. There are no overdraft fees, and other banking services like wire transfers are charged at their cost — roughly $.082 per transfer. Aspiration also acts in an otherwise socially conscious and sustainable way when dealing with money and investments. “We don’t use deposits to fund the oil and gas projects that are destroying the planet,” he said, reflecting increasing consumer desire among some segments, including younger people, to avoid having their money go to industries not deemed “green” or sustainable.

That’s not all, of course. “No one wants to pay bank fees,” Cherny added.

But such goals can be easier to plan than to meet when it comes to attracting banking customers. That is especially true when talking about enabling customers to set their own prices, which is the Aspiration model, and how it hopes to enable customers to feel as though they are avoiding excessive bank fees.

Failed Experiment

As this point, you might be reminded of the recent — and failed — experiment with consumer-selected prices via the Panera Cares effort, which involved the Panera chain restaurant. Rather than having a fixed cost for items, Panera Cares runs on “pay-it-forward” pricing, which encourages patrons to contribute more than a suggested figure toward purchases so the less fortunate can acquire meals at a discount. The last such store closed earlier this year in Boston. The failure was attributed to a variety of factors, including lack of viable payments from homeless consumers and students.

Cherny is certainly aware of that effort, and of the skepticism that comes with any such push to replicate what is called consumer-elective pricing. Indeed, when he was talking to potential Aspiration investors back in 2013 and 2014, he told Webster, his vision didn’t exactly spark confidence among the people with money. “It made for some very short conversations,” he said.

Things have changed in the four years or so since Aspiration’s launch.

“The great majority of customers do choose to pay,” Cherny said. “We are able to really rely on customers doing the right thing.”

That reliance, however, does require some nudging from Aspiration. That’s not a knock so much as yet another observation about human nature: Consumers simply don’t always know what to pay for services. Even the longstanding tradition of tipping in restaurants and bars can be confusing to some customers, who don’t always know the standard percentage expected for food and drink service.

Consumers are provided a range for how much specific services could cost, but it’s left to their discretion as to how much they actually pay.

“We try to provide information about the average fee for (the different) kinds of products in the market, ranging from the lowest fee to the highest fee,” Cherny said.

Aspiration also makes money on interchange, net interest margins and from other sources, he added.

Aspiration Results

So, what’s been the result?

So far, Cherny said, the California-based bank has attracted a geographically and economically diverse set of customers. “Only 6 percent are from L.A., New York City and the Bay Area combined,” he said. The customers tend to be on the young side — that is, below the age of 35 — which speaks to the focus on sustainability among millennial and younger consumers. “We want to build a community around shared values,” Cherny noted.

Some customers come to Aspiration as part of a full switch from other financial institutions, making Aspiration their primary bank. “Others will dip a toe in at first,” he said.

This particular experiment in banking still has a way to run, but there seems to be a sweet spot in all this — the intersection of sustainability and consumer elective pricing. Whether that can attract a significant amount of new customers remains to be seen.