George Hodges blog post on CFSI’s Compass Principles
Most banks we work with struggle with the Compass Principles value of “profitability and scalability” when looking at financial services for the underserved. Look at the current environment: consumer backlash to increasing fees on existing products and a hostile regulatory environment for small dollar credit products. To reference Arjan Schütte’s recent article, banks would seem to have two equally undesirable choices: be a mercenary or a missionary. He proposes a third path – be a visionary. I don’t know about that, but being a good data analyst and understanding your customer’s behavior is a start. Combining a basic segmentation analysis of your accounts with a look at their “whole wallet” of financial transactions can transform low balance, single account, unprofitable customers into a new profitable growth opportunity.
Here are some scenarios that may fit your financial institution:
- You recently completed a segmentation analysis of your customer base and identified that 35% are not profitable because their only product is a low balance checking or savings account.
- Your have a major university or large military base in your community, but 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/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, 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!
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!
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, 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.
Click here to access CFSI’s Compass Principles