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Big Idea: The Debanked

A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors

In previous posts, I’ve alluded to an emerging segment of consumers I call the Debanked

Mainstream consumers who willingly opt out of the traditional banking system.

Today, Aite Group published the report I wrote on this segment, which is titled The Debanked: A US$1 Billion Prepaid Debit Card Opportunity.

The report, written for Aite Group clients, focuses on the business opportunities this segment presents, and how to capitalize on those opportunities. To avoid cannibalizing the contents of the report, this post focuses on the other side of the coin: The threat this segment represents to banks, and yes, to credit unions.

The Un- and Under-banked

There’s a lot of press these days that alludes to Unbanked or Underbanked consumers. Unfortunately (but not surprisingly, given the intentions of the mainstream press), the differences between these terms goes unnoticed.

The FDIC published a report a while back in which they defined the Unbanked as consumers without a checking or savings account. The Underbanked was defined as consumers who use “alternative” financial products — like payday loans, check cashing services, rent-to-own products, etc. — in addition to their checking/savings accounts.

The Unbanked, per the FDIC, account for just 8% of US households. The Underbanked, on the other hand, totals 36% of US households.

Look to your left, look to your right, look in the mirror — odds are you just saw someone who qualifies as Underbanked.

Yet the bank-bashing press go ahead and paint the Underbanked as underprivileged, down-on-their-luck consumers getting taken advantage of by “predatory” large banks.

To be fair, there are many consumers in the ranks of the Underbanked who are going through tough times, find themselves un- or underemployed, in debt, and paying way more for maintaining a checking account than they should be.

Introducing the Debanked

But there’s a growing subsegment of the Underbanked that doesn’t fit this description — the Debanked. They’re young, highly educated, employed (or employable) — and they’re choosing to manage their financial lives without the help of a checking account, thank you very much.

They already use prepaid debit cards (GPRs), and are highly satisfied with the cards. (So please don’t tell me about the weaknesses and downsides of these cards, because what you and I think don’t matter — these people are very satisfied with the cards).

The Threat

And when they close out their checking accounts, $30-40 billion in deposits is coming out, and more importantly to banks, nearly $1.7 billion in revenue (including overdraft fees, monthly fees, lending fees, and debit interchange) is coming off the banks’ books.

My boss suggested to me that, while $1.7 billion might sound like a lot, as a percentage of total revenues, isn’t this just a drop in the bucket?

Yeah, maybe it is.

But there are reasons why this threat is important:

1. These aren’t “bad” customers. Back during the Bank Transfer Day frenzy, I speculated that maybe Bank of America had done the analysis, and determined that the customers they would lose by imposing a fee for debit card use were unprofitable customers they could afford to lose. It’s hard for me to see how the Debanked are bad customers. A larger-than-the-national-average percentage of them are college educated. Many are employed, and of those who aren’t, it’s because they’re still students. They’re heavy debit card users. And they bank and pay bills online (remember when the industry believed that the path to retention and profitability was to get customers to pay bills online?).

2. They might not be coming back. This is where the threat to credit unions come in. While CUs love to gloat about the number of people leaving big banks, the reality is that not all are leaving for credit unions. Many are leaving the traditional banking system. Considering the relative young age of the Debanked, and the desire on the part of pretty much credit union out there to lower the average age of their member base, this doesn’t bode well.

The short-term response to this threat is to develop and deploy a prepaid debit card program to keep these customers in the fold. Once again, please don’t tell me about the downside of the product, and how poorly other cards are designed. The failures of the Kardashians and Suze Orman aren’t indictments of the product — they’re simply examples of poor implementation.

The longer-term response is to re-evaluate the role of the checking account in the product portfolio. For too long, the product has been seen as the anchor product of a banking relationship. This assumption should be re-thought.

Ron ShevlinRon Shevlin is Director of Research at Cornerstone Advisors. Get a copy of his best-selling book, Smarter Bank: Why Money Management is More Important Than Money Movement. And don't forget to follow him on Twitter at @rshevlin.

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Comments

  1. Lisa Phillips says:

    Ron.. Well stated, again. Whoever controls the payments ‘system’ will rule. Experience/Engagement all wrapped up in one great ‘spend’ package to the new and good ole’ American consumer. Simple. & so Difficult 4 Ole’School FI’s to understand. Spend affiliation can lead to affinity can lead to Save affiliation… Borrow affiliation… Connect the dots, Create the circles of Spend, Save & Borrow….then get to the core of business/life. (Sorry, not giving that answer, jus yet 🙂

    jus Lisa
    ….and let me know if you want to discuss the new business model for Money(Ed) Mgmt 😉 Ed is/as an Educator/ion.

  2. Mark Argosh says:

    Ron,
    I agree with you that the debanked are a growing threat to banks. Banks are also losing large slices of their core business to non-traditional financial product providers. Their core small business and middle market commercial loan customers are being forced to seek credit from non-traditional sources of capital such as BDCs. Their investment clients are moving to independent wealth management firms. Consumers are using non-banks for various types of payment services. In general, few banks have developed an effective product roadmap for the future that addresses the fundamental financial needs that their customers have (consumer or business clients). The future result will continue to be revenue and margin declines. These declines will come from new habits of younger clients (much like telco, where young people don’t use wireline phones), new models for business credit, new payments service providers, and the lack of relevance of bank’s savings and investment products. Very sad.

  3. Ron,

    If you want to see this “debanked” phenomenon up close and personal, just walk into any Walmart that has a bank/credit union branch and a MoneyCenter. In the Walmarts I’ve been in, the MoneyCenters are always a lot more busy than the branches.

  4. George: Yes, definitely. According to the survey we did, nearly half of the Debanked had cashed a check at Walmart in Q4 2010 vs. about one in four other Underbanked consumers.

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