Two major studies are being conducted to examine overdraft practices in the banking industry—one by the FDIC and one by the General Accountability Office, Congress' investigative arm. Federal legislation (H.R.946) introduced by Rep. Carolyn Maloney, D-NY, is intended to rein in the billions of dollars that bank customers are paying in "hidden overdraft fees" each year. A congressional hearing is planned for later this summer to highlight abuses of the practice. With an election year on the horizon, is there any doubt that there will be changes to the current fee generation practices?

When we examine the improvement in bottom-line profits in the banking industry over the past 20 years, we can see that it has come primarily through non-interest income. The question at hand is this: When legislative change limits fee income, where will individual banks find an offset to bottom-line profits?

Bank analysts have been commenting on this issue for the past two years, concluding that there are two ways that banks will compensate for the pressure on revenue. Mergers and acquisitions will offer an opportunity to lower cost through resulting synergies, and reengineering of the existing processes will provide cost and market relief. Neither approach guarantees success. So often we see banks struggle with acquisitions, trying to sort out the organizational, operational, and technology synergies.

After the last round of acquisitions, the 50 top banks in the United States have a higher efficiency ratio than the industry average (64 percent vs. 60 percent). Big banks have concentrated on building a larger footprint in many cases without realizing the opportunities afforded by their new scale. Retail customers are not staying put when there are inconvenient conversions and apparent lack of individual care. This has frequently resulted in higher customer attrition than projected. We have seen large acquiring banks like Washington Mutual shift their strategy from growth to service excellence in an effort to retain customers.

Those banks who opt for internal reengineering have had mixed results, as well. The term "reengineering" is frequently misapplied to traditional work improvement techniques that result in incremental improvement without producing quantum gains in capacity and cost. Reengineering, in its pure sense, rethinks the underlying purpose of a process from the perspective of what the customer wants. At the heart of the approach, design teams include only work effort and elements that provide value and advance the decision or action. It is often difficult to differentiate traditional techniques from true reengineering due to marketing techniques that mask the differences in approach. It is important to look for 25 percent to 70 percent gains in productivity as evidence of true reengineering and not the 12 percent to 20 percent that traditional methods can generate.

It is clear, that in the short run, Congress has control of what the limitations to fee income are, but bank management does have control of how to design delivery processes and channels to overcome the lost revenue. It will be interesting to see which banks emerge and make the right choices.