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:
- 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
- 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).