Two Moments in Bank History

Ken Jablon: Combined Balance Checking Accounts & CD Incentives


While working at the Chase Manhattan Bank in the late 1970s, I was involved with two “moments in bank history,” one that launched a product still available today, and the other that lasted only a few weeks but was very controversial at the time.


A “Combined” Balance No-Fee Individual Checking Account


In the 1970s, New York savings banks were allowed to offer checking accounts to individuals for the first time. The regulation stated, however, that savings banks were not allowed to charge their customers for the account. Commercial banks had charged individual checking account customers a monthly fee and a fee for each check written unless they kept a large balance in the checking account. Because savings banks were charging no fees for checking accounts, commercial banks began to reduce or eliminate fees for their checking accounts.


It was expensive for banks to service checking accounts, and the revenue was being eliminated. As a member of the Strategic Planning area of Consumer Banking, I was assigned to a checking pricing project to determine how to solve this problem.


If we charged higher fees for checking than other banks, we would lose customers to those banks–and many of these customers had quite a bit of money with us. We decided to charge no monthly fee, no per check fee, no cash machine fee and no fee for “computer banking” if you had more than $2,000 in all of your linked deposit accounts at the bank; Chase did have rudimentary cash dispensers and a computer banking service. Two thousand dollars was a significant amount of money at the time. If you didn’t have the $2,000, you were charged a monthly fee for everything. We kept our better customers, others brought in more funds to avoid paying a fee and those with lower balances paid a monthly fee for the account.


Chase was the first major U.S. bank to offer a “combined” balance individual checking account. The other banks soon copied our pricing, and this type of pricing is still standard today.


Incentives for New CD Accounts


In 1979, I replaced Tom Lynch as head of Liability Product Management. (Tom went off to a major project to put in state-of-the-art ATMs in all of the Chase branches.)


Liability Product Management was concerned with the production, promotion and advertising of the individual customer checking and savings products/accounts. At the time interest rates for regular savings accounts and the recently introduced six-month Certificate of Deposit (CD) accounts were determined by the bank regulatory agencies and were the same for all financial institutions.


One way for banks to get new CD accounts was for banks to offer a gift to open a new account. The banking regulation stated, however, that the gift could not cost the bank more than $5 if the opening account balance was less than $5,000 or $10 if the balance was $5,000 or more. Citibank was “cheating” by paying their gift vendors marketing fees, which allowed them to offer more expensive gifts. (The Citibank lawyers were always more “liberal” in what they agreed could be done.) You could also give the customer the $5 or $10 in cash when they opened the account, but that wasn’t much of an incentive.


One day while riding on the subway to work, I was thinking about how we were going to compete with “cheating” Citibank to bring in more deposits.  Yes, the regulation said that you could not give the customer more than $5 (gift or cash) if the account was less than $5,000, but it didn’t say anything about the minimum account size. What if you opened an account for $1 and gave the customer a $5 gift? With this “multiple account” scheme, the bank could offer the customer an upfront gift that, in essence, would give them an extra .5 percent interest. (This was not that much at the time because six-month CDs were paying double digit interest rates.) I explained to our legal department how I thought this complied with the regulation, and to my surprise, they approved it.


Along with a “Chase Against Inflation” theme, we introduced these “higher rate” CD accounts with full-page advertisements in all the New York City and suburban newspapers.Customers were literally lined up in some of our branches to open up accounts.


A few days later Paul Volker, who was then the Chairman of the Federal Reserve, called Bill Butcher, the president of the bank.  Volker said, “You can’t do that,” and Butcher said, “Yes we can, because it complies with the regulation. It took the regulatory agencies a few more weeks to issue new regulations that stated that banks could not open multiple accounts to increase incentives.  By then, however, Chase had brought in a lot of new deposits and we had the momentum to continue to do so.






  A New Series


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