'Safe' Accounts for Unbanked on Rise; Do They Do Much Good?

This week Minneapolis-based U.S. Bancorp is launching a new consumer account that's designed to appeal to millions of Americans shut out of the mainstream financial system.

The product, known as Safe Debit, carries a rich array of features, including online bill pay and mobile check deposit. Consumers only need $25 to open an account. And they cannot rack up pesky, costly overdraft fees.

With the account's launch, all five of the largest U.S. banks by deposits are now offering an overdraft-free option to consumers. Combined, those banks operate more than 20,000 branches in 48 states. Regional institutions including Fifth Third Bancorp, KeyCorp and MUFG Union Bank offer similar products.

Still, it is unclear how much difference the consumer-friendly accounts are making in the lives of unbanked Americans, a group that the Federal Deposit Insurance Corp. pegged at nearly 9.6 million households in 2013. That is largely because there is no national data on the products' adoption.

And while everyone agrees that overdraft-free accounts can help those consumers who open them, regulators and consumer advocates are voicing concern about obstacles that appear to be suppressing usage of the products. For example, some consumers may be unaware of the accounts.

"What is clear enough is that if a consumer does not even know about a product, even one well-fitted to their needs, they cannot be expected to sign up for it," Richard Cordray, director of the Consumer Financial Protection Bureau, said during a speech in February.

Cordray's speech was part of an orchestrated arm-twisting effort by the CFPB. The agency also sent letters to the 25 largest retail banks, encouraging them not only to offer overdraft-free accounts — sometimes known as "safe accounts" — but to market their availability.

In his February speech, Cordray said that 10 of the nation's top 25 retail banks were not offering overdraft-free accounts. Another seven banks in the same group were offering the product, but they were not featuring them on their main menu of checking account options, he said.

Several observers said they believe the $439 billion-asset U.S. Bancorp is the first large depository institution to launch an overdraft-free account since the CFPB put public pressure on the industry more than six months ago. A CFPB spokesman declined to comment.

Another factor that may be holding back enrollment in overdraft-free accounts involves banks' customer-screening processes.

Typically, banks run consumer account applications through databases that flag negative information regarding the applicants' banking histories. Repeated instances of bounced checks and overdrafts can leave a stain on consumers' records.

Many Americans are currently unbanked because their checkered banking histories have resulted in denied applications. And their predicament will not necessarily be resolved applying for an overdraft-free account.

Jonathan Mintz is president of the Cities for Financial Empowerment Fund, which established a set of standards for overdraft-free accounts that have been adopted by the five largest U.S. retail banks. At the CFPB's February hearing, he urged banks to take steps to approve more customer applications.

Banks "can limit account denials only to customers with an actual, narrowly defined history of fraud," he said, adding that when consumers are applying for overdraft-free accounts, "a history of overdraft frankly shouldn't matter" because they will be prevented from overdrawing their accounts.

U.S. Bancorp does not plan to alter its customer-screening process for Safe Debit applicants, said Lynn Heitman, head of the bank's consumer products and services.

"The criteria for opening a new account at the bank is not going to be any different for this product than it is for any other product," she said.

U.S. Bancorp has been developing its overdraft-free account for more than a year, according to Heitman. She expects the product to appeal primarily to folks who are on the margins of the banking system. "We're in the business to serve all customers," she said.

The Safe Debit account carries a $4.95 monthly fee, the same price charged by JPMorgan Chase and Bank of America. It also offers customers free access to their credit scores. The account does not come with checks.

U.S. Bancorp has not set any projections for adoption of the account, Heitman said, but it is taking steps to market the product.

U.S. Bancorp plans to present the Safe Debit option to consumers alongside its other checking accounts, both in branches and online. "We want our customers to have a dialogue with the banker and really choose the product that's best for them," Heitman said.

In addition, the bank plans to work with community organizations that have clients looking for a low-risk account.

Some consumer advocates are skeptical that banks will ever put a lot of marketing muscle behind overdraft-free accounts, as long as those options are being offered alongside more profitable accounts that do allow for overdrafts.

"There's just not a lot of incentives for banks to put customers in those accounts," said Rebecca Borne, senior policy counsel at the Center for Responsible Lending.

For its part, U.S. Bancorp seems to be taking the long view with respect to the profitability of the Safe Debit account. The idea is that even if a specific customer does not contribute a lot of money to the company's bottom line right away, the relationship can become more lucrative over time.

"I can certainly tell you we've designed a viable product here for the bank, and a product that meets the needs of consumers," Heitman said.

When consumers do successfully open overdraft-free accounts, the results appear to be promising.

In 2011 the FDIC ran a pilot project in which nine financial institutions offered the product. At the end of the one-year pilot, 81% of the transaction accounts remained open, which exceeded the FDIC's expectations.

At the CFPB's Feb. 3 hearing, Christie McCravy, director of financial empowerment at the Louisville Urban League, said: "When someone comes into that branch, they are a potential customer for life."