The Flight of the UnbankedNitin Sumangali |
The new regulatory environment for banks in the United States is changing one of the most highly valued innovations in the banking industry’s recent history: Free checking. Banks like BB&T and SunTrust have said the new regulations have caused them to trim free checking options, but these actions may have the unintended consequence of driving profitable consumers out of the banking system.
The Council on Financial Competition estimates that the number of unbanked Americans could rise from 17 million to 23 million as result of the elimination of free checking. This doesn’t mean that 6 million consumers no longer need the services banks provide, but that they may be unwilling to pay banks for holding their money. Instead, consumers may look to alternative providers to meet these needs.
MasterCard has written about how banks can innovate their way to profitability in the face of diminished profits from regulation and about how banks may be disintermediated by alternative financial services providers. Now there is some evidence that these are scenarios are coming to pass around the world. In Latin America, there is a rise in the incidence of the “professional unbanked.” According to the Council on Financial Competition, many of these consumers have high incomes, live in urban or suburban areas, but still opt out of the banking system—33% in Mexico and 17% in Argentina. Banks in these countries face problems like developing scale in rural areas, unfavorable branch economics, and competition from non-bank players like Banco Walmart that are capturing a larger share of consumer loyalty and business.
Some of the barriers banks face in Latin America are driving profitable consumers out of the banking system; the same may happen in the United States. It shouldn’t be accepted as gospel that the move from “free checking” to “fee checking” will simply be accepted by consumers. In order to preserve their customer base, banks must examine all the tools that provide value to their customers and present a compelling reason for consumers to remain within the fold.
For example, they may decide to waive checking account fees for consumers who have car loans or mortgages with the bank. This could demonstrate how much value banks place on maintaining good relationships with their valued customers, and force banks to take a view of profitability that goes beyond a product and considers a whole relationship. Banks could also maintain customer relationships by offering reloadable prepaid cards to consumers who are opting out of full bank relationships. Underestimating the appeal of competitors both inside and outside the banking industry could be a grave mistake.