Bank Accounts Are Good for Everyone – and We Can Prove It (We Think)

by Patricia McGinnis 0

By Patricia McGinnis, Director, Mercator’s BankAdvisory Service

Last year, the FDIC released its “Survey of Banks’ Effortsto Serve the Unbanked/Underbanked” and one of the first findingsthey highlighted was the following:

Seventy-three percent of banks are aware thatsignificant unbanked and/or underbanked populations are in theirmarket areas, but less than 18 percent of banks identify expandingservices to unbanked and/or underbanked individuals as a priorityin their business strategy.

This is not to say that banks are not trying to do theirpart and the survey points out that many banks, especially largerones, provide educational services on financial literacy, forexample, or work through local organizations to help educate thissegment of the population on financial services management.However,the historical problem in actually providing accounts designed forthis constituency (as opposed to simply educating them), is thatthere’s very little money to be made from this sector and whatincome was available (primarily through overdraft fees) isessentially gone.Therefore, banks ask – what economic/operatingmodel can be carved out from the industry that offers a sustainablemarket and investment base?

In an effort to answer this question, The Federal DepositInsurance Corp. approved a pilot program last week to encouragebanks to create simple, low-cost deposit accounts (http://bit.ly/bX5rLu).The purpose of thepilot is to determine whether accounts with no overdraft and NSFfees, but instead ones which would charge “proportional”,cost-based fees are viable in the market. At the same time, theTreasury is seeking $50 million from Congress to create a “BankOn USA” program.The following excerpt is from the CommunityDevelopment Financial Institutions Fund Section of their 2011budget:

Bank on USAInitiative

The Bank on USA Initiative will promote access toaffordable and appropriate financial services and basic consumercredit products for households without access to such products andservices. These households face a number of problems, includinghigh fees for alternative financial services such as check-cashing;barriers to saving and building credit; and increased exposure torisks such as fraud and theft to extend local initiatives thatencourage people to set up bank accounts. The financial-regulationmeasure signed into law last month also directs the Treasury to usegrants and other agreements to draw lower-income consumers into thefinancial mainstream. Other initiatives are under way at the locallevel.

While the government’s previous attempts at motivating orincentivizing the industry to more fully serve this segment throughCRA initiatives has not proved successful, times are quicklychanging.Non-traditional financial services organizations arestripping off chunks of consumers from traditional bankingchannels. At the same time, consumers are rapidly gettingcomfortable using financial services on an ad hoc basis while alsoshopping around for services that have the best terms. Finally,with prepaid card accounts, a core financial services product forthe underbanked segment, potentially offering better interchangerates than a traditional debit card (post-Durbin), the economicmodel may not look all that bad after all (we think) – maybe thistime, the government might be on to something.