It is not surprising that most big banks are working hard to offload their least profitable segment of customers, those with one banking product and maybe $1,500 in their checking or savings account.
Most banks struggle with the value of “profitability and scalability” when looking at financial services for the underserved. The current environment underscores some of the frustration for traditional bankers: consumer backlash to increasing fees on existing products and a hostile regulatory environment for small dollar credit products. Traditional banks would seem to have two equally undesirable choices: be a mercenary or a missionary. There may be another path – be a visionary.
Traditional banks should do a better job at data analysis and a much better job of understanding their customer’s behavior. Combining a basic segmentation analysis of their accounts with a look at their “whole wallet” of financial transactions can transform low balance, single account, unprofitable customers into a new profitable growth segment.
Here are some potential opportunities:
- A recently completed segmentation analysis of your customer base identifies 35% that are not profitable because their only product is a low balance checking or savings account.
- There is a major university or large military base in your community, but you don’t have a good product fit for the student population or enlisted personnel.
- You have a youth/young adult strategic initiative, but don’t yet have a strong mobile or card-based product to support it.
- You have a growing working class population that is different than your historical suburban, mass-affluent target customer.
What each of these scenarios have in common is what the regulators call “underbanked” customers. According to the FDIC, this represents 23% of the population, totaling 60 million adults in the US. These are typically customers who only have a single savings or checking account with an average balance of less than $1,500 and are not an immediate lending opportunity. At first glance, as a traditional bank, this is your least desirable group of customers for profitability and growth.
But looks can be deceiving. If you only value their current account relationship, you are losing money on these customers, right? The deposit value of their low balance does not offset the cost of providing them a free account, and they do not generate any other revenue. However, if you were to spend a “day-in-the-life” with these same people, you would find that they make two or three visits every month to another financial services provider to cash their paychecks, pay bills, send money to family members, and purchase reloadable prepaid cards (to avoid overdrafts in their account). This monthly, reoccurring behavior represents an average of $30 per month or more in non-interest fee income, giving these “unprofitable” customers a real value of $360 a year! The 60 million unbanked and underbanked combined spend approximately $10.4 billion on “alternative financial products,” such as money-orders, payday loans or simple check cashing.
So, who is currently capturing your customer’s “whole wallet” of transactions, monthly revenue, and relationship potential? A few years ago, the answer would have been check cashing stores and payday lenders. Now, the list includes Walmart, Kroger, Rite-Aid, and an increasing number of large banks. If you don’t think that serving the underbanked has become mainstream, here are some compelling statistics. Reloadable prepaid debit cards are the fastest growing financial services product, and the two most recent IPO’s in the financial services industry were Green Dot and Netspend, the number one and number two providers of prepaid cards respectively. Or just stop by a Regions Bank branch and check out their NOW Banking product offering, which makes all these services available right at the teller line! Unfortunately, Regions reputation is suffering because of the steep fees they charge, thinking that they have a captive market. Maybe now, but soon, that won’t be true.
What these large non-financial retailers and banks have figured out is that by bundling “alternative financial services” and using outsourced technology and risk management providers, you can convert previously unprofitable customers into a profitable growth segment, save them money, and expand your relationship for future growth.
So, my advice to banks is to take a second look at your “unprofitable” accounts, and you may find a golden opportunity to profitably expand services to existing customers and create a “regulatory friendly” new revenue channel at the same time. The good news is that traditional banks will ignore me and this advice, enabling iPeopleFINANCE to serve this under-banked and under-served segment of the consumer finance market when we go live in September, without competition from traditional banks.
It would be really cool if I could now offer a coffee mug or toaster to our first 500 customers, but alas, I can’t do that today. But, if you will stay tuned and tell all your friends, when we get ready for pre-launch in August, I am sure we will have lots of cool swag for you and every one of our first 500. If you would like to get on our mailing list, please drop your e-mail address in as a comment to this post.
A free re-loadable debit card, peer-to-peer loans of between $5,000 and $25,000 at great interest rates, super-low fees, and a new credit bureau that will enable you to rebuild your credit! All online, 24/7, and FDIC insured. How cool is that?