Banks are working hard to cut costs and at the same time deliver more value for their now-pricier checking accounts. They are creating pricing structures that encourage customers to switch to electronic statements.
Banks are so busy tweaking checking account features, rewards and prices to shore up revenues that they are missing the most obvious new revenue source — expanding their offerings to the 43 million underbanked consumers they already serve by providing the kinds of transactional products and services they buy elsewhere.
Instead of seizing the opportunity, some banks are predicting the demise of underserved consumers. JPMorgan Chase CEO Jamie Dimon pronounced recently that the Durbin amendment to cap interchange fees would push an additional 5% of American families out of the banking system. Consumer groups likewise worry that, as the economics of banking shift under the weight of new regulations, their clients will be priced out of the market.
It is a mistake to assume that underserved consumers will simply close their accounts as prices rise. The data suggests that price is not the issue. The problem is value.
According to the FDIC's 2009 survey of un- and underbanked consumers, only 12% of the unbanked who previously had an account closed it because the fees were too high. About a third said they didn't have enough money to make an account worthwhile. Another 25% said they didn't see the value in having one.
Free checking accounts may have helped reduce the number of unbanked consumers over the last decade, but many of them still were left with unmet financial needs.
By definition, the underbanked aren't able to meet all of their financial needs through the bank. The underbanked make up 18% of the U.S. population, and the FDIC study showed that the nonbank products and services used most frequently by underbanked households are money orders (81%) and check cashing (30%).
Core Innovation Capital estimates that the financially underserved spend at least $29 billion a year on nonbank and subprime financial services. If banks are to succeed in claiming that revenue, they need to reacquaint themselves with the core needs of their existing underserved customers.
Liquidity: Consumers living paycheck to paycheck need immediate access to their funds. Most banks, however, won't cash consumers' checks if they are drawn on another depository. Customers are typically given the first $100 while they wait a day or more for the check to clear. Many consumers simply walk down the street to a grocery store or a retailer and pay a fee to cash their check.
We live in a real-time economy. Banks have more than enough technological horsepower and data on consumer behavior patterns to cash paychecks with little to no risk.
Just-in-time payments: Without a financial cushion, underbanked consumers often need to pay their bills the day they are due. They can't afford to schedule an online payment and have the funds pulled from their account several days beforehand.
Rent payments present a particular challenge. In a 2003 survey of low- and moderate-income households in Chicago, Los Angeles and Washington, 39% of those with a bank account paid their rent with cash or a money order, often because their landlords would not accept checks. A growing number of nonbank companies are offering expedited bill-payment services. Banks should integrate these offerings into checking accounts.
Small-dollar credit: When the car gets a flat tire or the roof has a leak, cash-strapped consumers need a way to bridge the gap. They need access to small amounts of credit with enough breathing room to repay without getting caught in a cycle of debt.
Most banks scrapped small-dollar consumer lending years ago. Given the current regulatory climate, the large banks are ironically in the best position to build scalable products.
Small-scale savings: For the underserved, savings may feel like a luxury rather than a necessity. Accumulating even a couple hundred dollars can help smooth cash flow and provide a cushion. A combination of electronic cookie jar, social media support and rewards is what's needed.
At least so far, consumers aren't being driven out of banks by increased fees. They are opting out because they don't derive enough value from checking accounts to make the monthly fee worthwhile. And waiting in the wings are an increasing array of innovative alternative products and providers. The question is this: Do banks want the business of underserved consumers enough to fight for it?
