Banking The DeBanked

How’s this for coincidence: Today, Aite Group published my report Marketing Prepaid Debit Cards To Overdrafters and Harvard Business School published a white paper on overdrafters titled Bouncing Out of the Banking System: An Empirical Analysis of Bank Account Closures. 

The write-up on the Harvard paper included this comment:

Between 2000 and 2005, United States banks closed 30 million checking accounts of excessively overdrafting customers. It’s a significant action because people whose accounts are shuttered have to turn to costly fee-based alternatives to receive banking services—if they can get them at all.

My take: Hogwash. A load of populist crap. 

If a consumer is paying hundreds of dollars a year in overdraft fees, then why would an alternative product  like a prepaid card be considered a “costly fee-based” alternative?

As part of their marketing strategy, many prepaid card issuers target overdrafters. The challenge, however, is that Aite Group’s research found that prepaid card issuers’ overdrafter opportunities aren’t as lucrative as they might think. The majority of overdrafters pay an overdraft fee just once or twice a year, making the economics of switching their banking activity to a prepaid card less than worthwhile.

In fact, many overdrafters won’t switch to prepaid cards based simply to avoid paying overdraft fees alone. Low awareness of prepaid cards among overdrafters is a hurdle that prepaid card issuers must overcome before they can effectively market the product.

But there is a segment of banking customers that are looking to switch — or have already done so. These are the Debanked — consumers who choose to opt out of the traditional banking product structure, and opt to manage their financial lives with products that are typically considered to be “alternative” financial products.

There are two problems with the populist view of the market, so often adopted by ivory tower college professors and newspaper-selling journalists:

  1. There’s a portion of the “unbanked” population that consciously chooses to be part of this population and is NOT in any way, shape, or form “victimized” by the financial services industry, and
  2. Alternative financial products, many of which have fees associated with them, are not inherently evil, predatory, or economically disadvantageous to the consumers who use them.

There is a significant business opportunity for both banks and providers of alternative financial solutions (i.e., prepaid cards, check cashing services, etc.) to identify the DeBanked and potentially DeBanked consumer population and craft solutions for this market. (Sorry, can’t get into more details here–that’s what my Aite Group report is for).

—————————————————————————————————————-

Check out Snarketing 2.0: A Humorous Look at the World of Marketing in the Age of Social Media (print or Kindle format):

—————————————————————————————————————-

Advertisements

5 thoughts on “Banking The DeBanked

  1. As banks move away from Free Checking and more customers may willingly or unwillingly become disenfranchised with the traditional banking products, a prepaid debit card is a good potential solution. Not only is there normally a reasonable monthly fee ($5) associated with the service which is significantly less than a check cashing service or paying multiple overdraft fees, but the account can work much like a checking account (even having rewards, savings accounts and bill payment tied to the service). This is a perfect product for those households either closed out of the banking system because of prior banking behavior or even select target audiences such as students. There are no ‘hidden’ fees and the cost of managing the account is low. From the bank’s perspective, this service can even generate more revenues than a low balance checking. I believe that as banks formalize their revised checking product continuum, more people will become aware of this service and a broader demographic will find the service a viable alternative.

  2. Ron,

    Absolutely agree. I made the same observations about 6 months ago in a series of briefings I did for Sapient. I’ve recently been referring to the ‘de-banked’ in my presentations, based on your lead with the nomenclature.

    The real risk the industry faces right now is increasing irrelevance. The fact that numerous work-arounds are coming into play (prepaid debit cards, paypal, google wallet, etc), thus negating my need for a traditional “bank” relationship. I’m sure the report would show that a high percentage of de-banked are prime credit rated and college educated.

    Brett King
    Bank 2.0

  3. This product/strategy is well within Credit Unions wheelhouse. It baffles me though when I see potential members flat out turned away at CUs because of chex or telecheck records. Aren’t these the same people we get supposedly get a tax exemption to serve?

  4. Ron, in your fervor for promoting prepaid you’re totally ignoring the elephant in the room – the cash flow issues that are quite frequently an underlying problem for many overdrafters. That’s where the check cashers and prepaid lending folks step in. And their fees ARE high – a significant % of their clients’ income. And they understand this market segment far better than banks.

    I’m not judging – just observing.

  5. Ex-Banker: Fair and valid points.

    But I don’t think you’re describing the REAL elephant in the room, which, as far as I’m concerned, is the fact that the cash flow issues that underlie the Overdrafters’ problems are nobody’s fault but their own. Instead of assuming personal responsibility for their financial situation, many people look to blame someone else. This doesn’t exonerate banks for charging ridiculously high overdraft fees. Nor am I saying that prepaid card providers’ fees aren’t high, or that they’re all justified as well.

Comments are closed.