Is The Problem in Banking the Overbanked?

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JJ Hornblass at recently blogged about a survey of consumers conducted by the American Bankers Association, which found that 53% of consumers (believe that they) pay no monthly fees for “checking account maintenance and ATM access.” Three groups, each totaling 14% of consumers, pay $3 or less, between $4 and $9, or more than $10.

As JJ points out, these percentages only add up to 95%, which means 5% have no idea how much they pay each month. According to JJ, “that’s the news here.”

My take: I agree with JJ that identifying a segment of consumers that don’t know how much they pay is important, but I don’t think it’s the only newsworthy item, let alone the most important part of the news.

What’s hard to tell from the description of the survey question is whether or not respondents were factoring in overdraft fees into their estimates of their monthly checking account costs. If they did, then the category “more than $10” could be very misleading.

Here’s a back-of-the-envelope calculation: The Financial Times reported that banks made $38.5 billion in overdraft fees in 2009.  The FDIC found in a 2008 study that 9% of banked households account for 84% of all NSF income. By my calculations, that means those 9% of households are paying not just “more than $10” per month, but more like $300 per month.

Even if my assumption about the inclusion of overdraft fees in the survey respondents’ estimates are wrong, one can’t help but conclude that there are a lot of consumers out there who would be better off without a checking account than with one.

This is exactly what a colleague of mine found in a report he published last year called Prepaid Debit Cards: A Credible Alternative to Checking Accounts. He concluded that “at least 14% of U.S. checking account customers would be better off using a prepaid debit card, based on an evaluation of each product’s cost as a percentage of deposit inflows.”

It’s no coincidence that the ABA study found 14% who pay more than $10 per month. To me, that’s the news coming out of the ABA study.

What the results of the ABA study suggests — reinforcing my colleague’s findings — is that there is a sizable percentage of consumers that are overbanked — i.e., they have a checking account but, perhaps, shouldn’t have one.

The shortsighted will see this as yet another potential loss of a revenue stream for banks. The farsighted will see this an opportunity to utilize prepaid cards as a viable banking product.

The nearsighted probably can’t even read what I’m writing.

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