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).

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

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Maybe Bank Of America Has A Plan

Maybe — just maybe — Bank of America has a well-thought out plan behind its debit card fees.

Maybe it actually WANTS customers to leave.

Crazy talk, you say? Not sure about that. After all, ING Direct has been lauded for “firing” customers. Bank Technology News wrote this a while back:

“To promote customer homogeneity and keep costs down, ING Direct won’t hesitate to fire customers who demand too much. Better to win over customers with shrewd marketing and good rates wrought by the cost efficiencies of doing business online.”

So, rather than flat out telling unprofitable — or potentially unprofitable — to close out accounts, BofA figures, “hey, we’ll slap a fee on them, and if they don’t like it, they’ll leave. And if they stay, they become more profitable.”

And wouldn’t you know it, but Durbin opens his mouth, and HELPS BofA by telling those customers to “walk with their feet.” Talk about effective word-of-mouth marketing!

So what happens if 1 million customers leave BofA?

If they’re truly the least profitable customers, BofA’s average customer profitability increases. And with less unprofitable customers to serve, the bank can more easily shrink to a more manageable size.

But you know what else happens?

Unprofitable — or potentially unprofitable — go join credit unions or open accounts at community banks. The credit union folks think this is great because it probably means the average age of members goes down. Hooray!

But oddly, the credit union’s profitability is adversely affected. Because if it’s low balance accounts  walking in the door, the income accelerator — the revenue generated on deposits beyond the spread and fees — is diminished. (This by the way, is one of the key reasons why high-yield checking accounts are more profitable than no-interest accounts. See my report on Why High-Yield Checking Accounts Trump Free Checking).

Let’s look at a  scenario: Assume you have 100 customers, equally split across 4 segments. Assume that the average profitability per customer of segment 1 is $1, segment 2 is $2, segment 3 is $3, and segment 4 is $4.

You’re making $250 in profits with average customer profitability at $2.50/customer.

If, thanks to BofA, 25 new Segment 1 customers walk in the door, profits go up to $275, but average profitability declines by 12% to $2.20/customer.

If the four segments represent the generations, it’s possible that you will lose Segment 4 customers (Seniors) over time. So let’s say 25 new Segment 1 customers come in thanks to BofA, but 10 Segment 4 customers are no longer with you. Profitability still goes up, to $255. But average profitability declines to $2.13, a 15% drop.

And if the ratio of customers in the four segments doesn’t change — that is, if segment 1 customers don’t become as profitable as segment 2, 2 as profitable as 3, and 3 as profitable as 4 — over time, then your FI is in trouble.

Oh sure, you can hold hands and sing cumbaya and hope those customers become more profitable over time. But smart firms don’t do that.

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So maybe BofA’s plan is to drive out customers it doesn’t think are — or can be — profitable, and let some other FI deal with them.

I’m sure many credit union marketers are thinking that this is great, that they would love to have those relationships, and grow with them over time.

Maybe they can. But if the BofA rejects….oops, I mean defectors….are the younger, less affluent, Gen Yers, then it may take some time for them to have a material affect on the CU’s profitability.

I’ve heard CU cheerleaders talk about being more open to extending credit to younger and less affluent consumers, and finding ways to help those consumers manage their financial lives without the high rates and fees that the big banks charge.

But there’s a reason why those consumers either don’t get credit or have to pay higher rates and fees to get credit, loans, and accounts. They’re higher credit risks, and they bring less funds to the table, resulting in less profits.

Seems to me there are a number of people in credit union land ignoring those realities.

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But, back to BofA, maybe the imposition of fees on debit cards is a smart move for the bank. I wouldn’t have advised the bank to do what it did, instead, I would have told them to levy fees on writing checks.

How To Differentiate Your Credit Union

On the CU Water Cooler site, William Azaroff wrote:

“When I look at many credit unions, I’m troubled by their blandness, their inoffensiveness. They used to stand for something, but now they’re moving away from differentiation and towards sameness. And many credit unions are doing this at the precise moment when differentiation is a necessity. The question is: do some people hate your brand? If some do, then I would say you’re doing something right. If not, then I’m guessing your organization is trying to be all things to all people, and should take a stand for something and embed that into your brand.”

My take: To quote former President Clinton: “I did not have sex…” No, wait, that’s the wrong quote. I meant this one: “I feel your pain.”

William is spot on that many credit unions aren’t differentiated in the marketplace. What William didn’t get into, however, is why few credit unions are effectively differentiated. There are (at least) three reasons why undifferentiated credit unions are that way:

  1. They don’t know how to differentiate themselves.
  2. They think they’re differentiated, but don’t know better.
  3. They don’t want to be differentiated.

The last reason might surprise you, or strike you as wrong. But after 25 years of being a consultant, I can’t even begin to count the number of times I’ve made a recommendation to a client to do something, only to be met with the following question: “Who else is doing that?” Risk adversity runs deep in the financial service business.

There are also a fair number of CU execs who think that their CU is differentiated. Almost to a man/woman they give the same description of what differentiates their CU: “Our service.” This is often — I’m inclined to say always — wishful thinking. Why? First, service may be what your firm does best, but it doesn’t mean your service is comparatively better. And second, because service means different things to different people.

The most prevalent reason why so many CUs are undifferentiated, however, is probably the first reason: They don’t know how to differentiate themselves. 

I’m not looking to pick a fight with William — I suspect he would agree with me here — but approaching the topic of differentiation from the perspective “what can we do to tick people off and be hated by some of them?” is not the right way to go about it. 

And with all due respect to my friends in the advertising business, the last thing a credit union should do is bring in the advertising people to help them figure out how to differentiate the CU. 

Why? Because there’s a prevalent — but misguided — mindset among advertising people that differentiation comes from “the story you tell.” (If you need proof, go read Seth Godin).

But the story you tell doesn’t differentiate you. What differentiates you is the story that your members tell. That they tell to themselves inside their head, and that they tell verbally to their family and friends. And those stories only come from their experiences with the credit union, not the advertising. 

Which means this: Differentiation comes from something you do

That “something” must be meaningful to members. And that something must be something that: 1) only you do; 2) you do measurably better than anyone else; or 3) you do measurably more often than anyone else.

Differentiation doesn’t come from standing for something, and it doesn’t come from your branding efforts (your differentiation drives your brand, not the other way around).

William’s credit union Vancity “stands” for community development and improvement.  So do plenty of other CUs. What differentiates Vancity is that — time and again — they do something about it. They can count the number of times they’ve done something about it, and they can measure the impact of what they’ve done.

Differentiating on service is tenuous. What does that mean? That you fix your mistakes better than anyone else? That the lines in your branch aren’t as long as they are in the mega-banks down the street? That Sally at one of your branches greets everyone by name and with a smile when they come in?

If you’re going to differentiate your credit union, you have to do something. Different, better, or more. None of those options is particularly easy to do. Technology initiatives intended to gain a competitive advantage — mobile banking, remote deposit capture, etc — are often easily (I didn’t say cheaply) copied. Better is hard to prove. And “more” requires strong commitment from the management team for an extended period of time.

This isn’t to say that aren’t opportunities for differentiation, just that they require commitment — and a lot of it.

So what can you do to differentiate your CU? I think it comes from committing to differentiate in one — and only one — of the following areas:

1. Advice. Managing our financial lives is tough and getting tougher. People need help making smart financial choices. But the advice available in the market tends to be focused on asset allocation and stock picking for the relatively affluent, or focused at the very lowest end of the income spectrum for people who need help with serious debt problems. What about everybody else in the middle? What about providing help with all those everyday/week/year decisions that have to be made? PFM holds the potential to provide and deliver this kind of advice, but the tools aren’t quite there yet. If this is the path you choose, you’re going to have to make some investments to develop them and get them to point where they can deliver on this promise.

2. Convenience. There’s one bank in the Boston marketplace that advertises itself  as the “most convenient” bank. Hooey. Having extended branch hours and free checking isn’t “convenience.” Making people’s financial lives easier — i.e. more convenient — to manage is a complex and difficult proposition. But when you’re really doing it, people know it. And you’ll be differentiated.

3. Performance. You might not be the easiest FI in the market for me to deal with, and you might not provide me with any advice (maybe because I don’t want any), but if the performance of my financial life — that is, the interest I earn, the fees I pay, and the rewards I get and earn, are superior to everyone else out there, than I will consider you to be differentiated in the marketplace.

I didn’t say differentiation is easy.

Financial Services Regulations: Intellectual Monstrosity

I spent a couple of days last week attending the Federal Reserve Bank of Chicago’s annual payments conference. If you’re involved in the world of retail payments, you should really attend this conference next year. As with other good conferences, what really differentiates this one is the quality of attendees. Lots of really smart people in the room, and what made it even more interesting was the mix of merchants/ retailers, FIs, academics, consultants, and vendors.

For me, the highlight of the conference was the closing session titled “Where Are We Headed?” Based on the panelists remarks, I think the consensus answer to that question is “further down the toilet we’ve already been flushed down.”

The four panelists were Glenn Fodor, Vice President, Morgan Stanley;  Ronald Mann, Professor, Columbia Law School; Omri Ben-Shahar, Professor, University of Chicago Law School; and Richard Epstein, Professor, University of Chicago Law School.

Unfortunately for Mr. Fodor, the three academics really dominated the discussion. What the three professors had to say, however, was very enlightening. Their comments touched on:

1. Financial product safety commission. Mr. Mann commented that the prevailing theory underlying the prevailing approach to regulation is that people will spend and borrow more than they should — causing greater level of distress — and that we need to impose behavioral limitations through regulatory actions.

Mr. Mann explained that this theory holds that products exploit consumer behaviors, and therefore need to be regulated. He did go on to say, referring to the proposed consumer safety commission, that it’s difficult to construct a federal agency for this.  As Mann put it:

“If you don’t know what makes a product “unsafe”, how can you have an agency to protect consumer safety?”

Epstein jumped in on this point, as well, commenting that “since the Obama administration doesn’t know what’s it doing, it might as well delegate it to an agency that doesn’t know what it’s doing.”

According to Mann, “there is a need in the market for credit products, and therefore, for risky products. Credit cards are an efficient way to borrow money — and the regulations negatively impact this.”

2. Disclosures. Professor Ben-Shahar has studied the role of disclosures in the financial services world, and has concluded that, by and large, they are ineffective. They lead to a “one-size fits all approach to risk” which, in turn, leads to negative impact for everybody. According to Ben-Shahar, there has been “no indication that an increase in disclosures has had any positive benefit.”

Epstein’s comment on this topic was that the government assumes that consumers are too ignorant to do anything but read government forms. But Ben-Shahar pulled out an example of one of these disclosure forms — a four-pager — and asked if anybody in the audience read it when they applied for a credit card. No one raised their hand.

What the professor did suggest, however, was that financial firms should show people how “others like me” deal with the payment burden –- and not just the total amount over the life of the loan.

3. Durbin amendment. None of the panelists were quite as outspoken — or as colorful — as Professor Epstein. Commenting on the Durbin amendment, Epstein called it:

“A monstrosity of the worst intellectual order”

According to Epstein,  the guidelines are “all nuts  — they only include incremental costs”, and that the result of the rules will be firms that are “too big too succeed” let alone too big to fail. Epstein agreed with a lawyer in the audience who suggested that the amendment will lead to financial firms creating affiliates with less than $10 billion in assets.

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I had a chance to talk with Epstein one-on-one after the session, and asked him to comment on my take on the regulations: That they represent a response to an environment (i.e., a market and economic environment) that existed in the past and is no longer valid. And a result of this changing environment, the regulations become less effective or relevant for both the current and future, and furthermore, will only help to retard economic growth moving forward.

He agreed. (Although, he might just have wanted to get out of there).

What PFM Providers Need To Provide

Apologies for the sports analogy which I know so many of you hate.

But there it was — the easy layup, the slow ball just waiting for me to knock out of the park….and I blew it. Whiffed. Failed to sink the basket. On the CU Chat Up the other day, @clagett set me up, and I failed to deliver.

He asked:

What do PFM (personal financial management) providers need to provide?”

My response was that PFM providers had to help FIs understand: 1) the ROI of PFM investments, and/or 2) the role of PFM as a component of a customer relationship infrastructure.

Maybe that wasn’t a terrible answer, but it wasn’t the best answer.

The better answer: PFM providers need to help FIs understand how to use the data. How to get the data out, how to store it, how to deploy it, and when to deploy it.

The challenge isn’t simply a technology challenge, it’s a business challenge. Many marketers are used to determining what offers to make based on demographic and purchase data, so they don’t know: 1) how to incorporate behavioral data, and/or 2) how to provide advice or guidance messages (and not just offers).

Unica recently released the results of a study of marketers that found that 75% of respondents say they use — or plan to use — online behavioral data when making decisions about marketing offers (15% of respondents were banks). I would have been interested in seeing what percent are currently using online behavioral data. I would bet the percentage is a lot lower, and “planning” to use it is not something I’d take to the bank (pun intended).

The PFM market is in its really early stages. Way too early to call winners and losers. But the ability to use the data will become a competitive factor.

Anyway, had to set the record straight here. My answer’s been bugging me.

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The Secret Of High-Performing Credit Unions?

Imagine that there are two groups of credit unions. We’ll call one group the HPs (for high-performers), and the other group we’ll call…the other group.

Over the past two years, average membership growth for the HPs has been three times higher than that of the other group. Further, the HPs’ two-year loan and net-worth growth have been nearly twice as high, and their growth in market share has been 20% higher than the market share growth of the other group.

Which group would you want your credit union to be in?

Duh.

The more important question, of course, is what did the HPs do differently?

Based on research on 54 credit unions that participated in a research study Aite Group recently conducted, I can tell you that: 1) We did find two groups, and 2) There is (at least) one very important difference between the two groups worth noting.

That difference? How the HPs manage IT.

I know you’d like to believe that it was their use of social media, or their focus on Gen Y or whatever other technology or product you champion, but I really don’t think that’s it. Because the HPs probably wouldn’t have made that investment in social media, or in other technologies, if it weren’t for how they manage IT.

When I talk about how they manage IT, I’m referring specifically to three dimensions: 1) IT risk tolerance; 2) executive support for IT; and 3) IT/business coordination.

Credit unions that show a tolerance for IT risk, have strong executive support, and enjoy excellent coordination between IT and the business outperform other credit unions — regardless of which technologies they invest in.

I’ve seen a lot of discussion online among credit union people about how to get their management team fired up about — or even remotely interested in — social media. Some of the recommendations from people revolve around “showing them the ROI.”

The paradox of the situation is that while there may very well be an ROI — or at least some tangible business benefit — the problem is that many management teams aren’t inclined to make the investment because they’re not tolerant of risk and/or don’t have a fundamental belief in the value of technology as a business enabler or competitive differentiator.

In other words, it doesn’t matter what the ROI is.

So, before you start advocating for Twitter, blogs, Facebook, etc., at your CU, ask yourself if your CU has a history of being comfortable with IT risk, executive support for IT, and coordination between IT and other departments. If not, you’ve got some work to do.

Imagine that there are two groups of credit unions (CUs). Over the past two years,
one group’s membership growth has been three times higher than that of the CUs
in the other group. Further, the first group’s two-year loan and net-worth growth
have been nearly twice as high as those of the second group, and the first group’s
growth in market share has been 20% higher than the market share growth of the
second group. Which group would you want your credit union to be in?Imagine that there are two groups of credit unions (CUs). Over the past two years, one group’s membership growth has been three times higher than that of the CUs in the other group. Further, the first group’s two-year loan and net-worth growth have been nearly twice as high as those of the second group, and the first group’s growth in market share has been 20% higher than the market share growth of the second group. Which group would you want your credit union to be in?