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PCBB Banc Investment Daily January 06, 2015
Banc Investment Daily
January 06, 2015

Zombies - The Undead Or The Unbanked

The 1930's and 40's were the heyday for monster movies at Universal Pictures. Horror icons like Boris Karloff (Frankenstein and The Mummy), Bela Lugosi (Dracula), and Lon Chaney, Jr. (The Wolfman) helped Universal corner the market on the undead. Critics and the movie-going public delighted in cowering under their theater seats while watching their favorite fiends, and Universal kept the title of undisputed "king of the undead" for decades.
Flash forward 80Ys from the glorious gory days of Universal and the US banking industry has an "undead" theme going on too. First there were zombie banks identified as those banks with no assets of value or deposits of worth during the early days of the financial crisis. Now there are zombie customers that add little value to banks yet cost a lot to service. The FDIC tags the unbanked household total at almost 10mm households.
Furthermore, the percentage of underbanked households that use a limited number of banking services comes in at around 20% of the population (24mm). Combined, that's 27% of households that are largely bypassing what banks are offering.
The FDIC survey also found that about 36% of unbanked households said the main reason they did not have an account with a bank was because they did not have sufficient money to meet minimum balance requirements. Perhaps that is why 22% of unbanked households said they used a prepaid debit card in the prior 12 months vs. 13% of underbanked and only 5% of fully banked households. Finally 25% of households have used at least one alternative financial service (AFS), such as non-bank check cashing or payday loans in the past year.
This is a difficult topic for banks as there is heavy regulatory pressure to avoid credit issues, not charge for overdrafts and yet have the expense of administering low balance accounts. Given the size of this potential customer base, banks continue to test out strategies. Some strategies that may offer a place to start include: exploring opportunities to deploy and market checkless checking accounts; providing other payment options to meet transactional needs; integrating mobile banking with branch-based strategies; finding ways to help maintain relationships through economic transitions such as job loss. These service options should cost less to administer than traditional checking accounts and can help keep consumers out of trouble.
TD Bank has successfully reached out to lower end customers noting, "One in five consumers with a bank account are using alternative banking products, which adds needless cost to their monthly budget. Consumers who are using these types of services should have a conversation with a banker to learn about less expensive financial products that can meet their everyday financial needs."
It seems some people are less likely to have that conversation, perhaps because they are afraid of rejection. As a result, they stick with more expensive prepaid credit cards or check cashing services. Community banks can play an important role in helping and perhaps capture some new customers that will grow in value over time by offering the right set of products. Who knows, perhaps community banks with the right combination of products can even wake the undead and show them that they have a lot to live for in dealing with smaller banks.