When I got my first checking account, the consequences for writing a check without the funds to back it were different than they are today. In those days, overdrawing an account was considered a behavioral issue. The fees were relatively the same then as now, but it came with a stigma. Only people with no discipline did that.

Today, we have overdraft protection, an “opt-in” service that we profit from greatly. We have conveniently allowed ourselves to overlook the fact that only a small percentage of people chronically do this to their own detriment. In my view, of all the fee income practices in use today, allowing chronic overdrafts to enhance non-interest income will ultimately be restricted by the Consumer Financial Protection Bureau. Bank and credit union leaders see this potential loss of NSF income as a threat, but it pales in comparison to our inability to recognize that the American population is experiencing steep financial decline and will ultimately change the retail banking model, right under our noses.

The Rules of the Game Are Changing – And Bluebird is Only the Beginning

A recent CNN poll indicates that up to 76% of Americans are now living paycheck to paycheck and that personal savings is almost non-existent for a majority of families. We have seen what this does to our customers’ propensity to borrow. But potentially worse is the seismic shift in the country from full-time to part-time or contract employment. June’s employment report is only the latest indicator.

We are clearly not geared for this change. While last week’s decision to delay the employer health coverage mandate (until after the mid-term elections) helps, it will not stop the fact that we are moving toward a much larger customer base that has very little job security and one that will behave differently in the future.

The threat, GonzoBankers, is that we continue to cling to a pricing model that puts revenue over relationship. This includes a growing set of forces designed to destroy our intermediation-based banking model, to decouple our services model – the move toward a la carte financial services. This is a concept that resonates with more than just the Gen Y market segment. Pay-Pal has well over 100 million users, almost one-third of the U.S. population. According to eMarketer, PayPal users are younger, better educated, and make more money that the overall population.

On the other end of the socio-economic spectrum, we have an equal threat – Walmart. The retail giant has always understood that there is big money in serving the “under-banked,” and it has teamed up with American Express to bring Bluebird, a “checking and debit alternative,” to a target market that includes the younger demographic segment, middle income families and the under-employed. The point of sale is, of course, Walmart. The bank, in essence, becomes every Walmart in the country. I am convinced that it won’t be long before some type of overdraft credit will be made available to Bluebird users.

While there are still process issues with Bluebird, the basic idea of a payroll-driven debit account with full remote mobile functionality will grow. Walmart and its big-box allies are gearing up for the second big push to control point-of-sale interchange. Earlier this year, Mike Cook, banking VP for Walmart, speaking to the Money 2020 Merchant Payments Conference, said: “Think of how easy it will be to disintermediate financial institutions. I don’t think they’ll even see it coming.” But the longer-term play is to pull both the lower end of the socio-economic spectrum and the younger demographic away from banks for payment services.

Put Relationship Ahead of Revenue

The best defense is a good offense, it’s true. We need to do all we can to prevent the decoupling of the payment account relationship, not just legislatively but practically. I have a few suggestions.

1. Consider partnering with PayPal. We are beginning to see banks and credit unions partnering directly with PayPal to integrate its online payment services.
2. Offer two distinct spending account options – one allowing for an opt-in negative balance feature and the other a debit-based account with no overdraft option. Both accounts would offer full remote access. Pricing would be set on a cost plus basis.
3. Relax restrictions on individuals who have trouble passing check systems. While it is not reasonable to enable behavior that keeps people in a vicious cycle of overdraft charges, these people still need payment services and can be good borrowers. Offer them the debit account option.
4. Provide credit-rebuilding loans that require repayment by direct deposit.
5. For younger customers, create a legacy account, a regular checking account or debit spending account, including remote banking and credit products priced on the basis of the parents’ total relationship with the bank. Promote this to the parents. We all know that it is much harder today to establish an independent household.
6. Work with business customers to provide employee banking services through the payroll debit card. Provide pricing incentives to business customers that help sign up their employees for bank-at-work services.
7. Organize Web content into life-situation sections, as opposed to listing what the bank offers. Promote the bank’s ability to provide solutions to real-life problems, such as the growing lack of job security.
8. Become active in local efforts to build employment resources, such as job fairs and local job boards.
9. Find a way to extend needed credit wrapped around student debt. This might require factoring existing student debt payments into underwriting standards.
10. Provide financial learning, credit counseling and disciplinary training resources to willing customers.

The 2013 Edelman Trust Barometer continues to list banks and financial providers at the bottom of the trust scale for all major economic sectors. The reason continues to be that banks pursue revenue over relationships. Enlightened leadership will sooner or later realize that providing solutions to real problems still matters.
-TT

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