Big Banks Prey On the Struggling and Underbanked Consumer
By Gina Ragusa Credit Unions Online
Every day millions of Americans grapple with ways to accomplish more with less money. From cutting out coupons to reducing some of life’s luxuries, the average consumer is trying to hold onto as much of his dwindling cash as possible.
Although some financial institutions are trying to help consumers retain more money, a recent The New York Times article describes how some big banks may be trying to pry a few more bucks from consumers who can afford it the least. In early 2012, big banks touted that they were only interested in the top 1%, however recent activity suggests that they also want the underbanked assemblage as well.
According to the Federal Deposit Insurance Corporation, approximately nine million households in the nation do not have what's considered to be a “traditional” bank account. Additionally, the FDIC says that 21 million or 18% of Americans are underbanked.
The Times said that banks like U.S. Bank, Regions Financial and Wells Fargo are among the big players interested in capturing the low-income and/or underbanked consumer in an effort to offer “alternative” financial products--for a substantial fee.
Nursing assistant David Wegner found out that some big banks don’t truly care about the struggling consumer the hard way. “I may as well have gone to a payday lender,” he told The Times. Wegner thought he dodged a bullet by avoiding the payday lender and instead turned to his local Minneapolis branch of U.S. Bank to help him with his finances.
Wegner ended up with a checking account and a $1,000 short-term loan to help him pay for medications to treat his cystic fibrosis. According to The Times, the loan alone cost him $100 in fees, which increase without prompt repayment.
Are Banks All That Evil?
Mounting regulations like Dodd-Frank have put big banks in an “awkward” position. In the past these mega financial institutions had numerous financial avenues to keep their stockholders happy and the bank running like a well-oiled machine.
However, new regulations have eradicated traditional revenue resources, which have created a fee-fervor banking environment. From last fall’s Bank of America debit card fee debacle to news about “hidden” fees, big banks are trying to make up for lost revenue any way possible. One ongoing effort at the branch level is to cross sell fee-based products and services.
Wegner described the cross selling efforts at his local U.S. Bank as somewhat of a feeding frenzy and that the U.S. Bank representative appeared to be making every attempt to cross sell prepaid cards, check cashing and short term loan products.
“It was clear that I was not getting the same pitches that wealthy clients would,” he said. In order to avoid more cross selling chaos, Wegner avoids any face-to-face contact with his banker. “I go through the drive-through now,” he said.
However banks contend that they are simply offering a valuable service, like prepaid reloadable debit cards at a competitive rate to the underbanked. Last month a Consumers Union survey of prepaid cards found that some banks’ prepaid cards had lower fees than those offered by nonbank competitors.
Prepaid debit cards are a high cross sell priority at many big banks mainly because they produce revenue. The prepaid card at U.S. bank entails a $3 enrollment fee, a $3 monthly maintenance fee, $3 if the customer wants to visit the teller and $15 if the customer loses the card.
Capital One tacks on a $1.95 charge if the customer uses his or her prepaid card at an ATM more than one time per month. Wells Fargo charges $1 if the customer speaks to a customer service representative more than twice a month.
Former Federal Reserve Bank examiner, Mark Williams said of the trend, “It is a disquieting development for poor customers. They are getting pushed into high-fee options.”
In fact the Consumer Financial Protection Bureau is looking closely at these practices and are encouraging consumers to contact the agency if they feel duped by their financial institution.
“We look at alternative financial products offered by both banks and nonbanks through the same lens — what is the risk posed to consumers?” said CFPB Director Richard Cordray. “Practices that make it hard for consumers to anticipate and avoid costly fees would be cause for concern.”
Credit Unions Approach the Unbanked Differently
JetStream Federal Credit Union ($133 million, Miami Lakes, FL) CEO Jeanne Kucey says that rather than offer products like fee-driven prepaid debit cards, her credit union strives to find fee-free products and services that will best serve the member.
“We offer a second chance checking for people who would be normally shut out from having a traditional checking account in addition to different programs within the community that support financial literacy. We are always trying to do more, but know there is a lot of work to be done.”
Kucey says that 75% of her credit union’s membership is considered to be low-income and understands the importance of being able to offer a valuable service that won’t come at a cost to her members.
“We aren’t looking into the prepaid, reloadable debit cards because there’s no way I can offer them to the membership for free,” she explains. “Instead we recently introduced mobile banking and experienced a surge in sign ups, beyond what we were originally expecting.” She says that being able to offer mobile banking comes at a cost to the credit union but is offered for free to her members.
“We are currently looking at remote deposit capture and business lending is also a high priority,” she says.
A spokesman from People’s Community Credit Union ($19 million, Hopkins MN) said that finding a way to deliver valuable financial services without charging high fees is a priority at his credit union as well.
Recently, People’s Community introduced a fee free second chance checking product after encountering several members or prospective members who were unable to secure a traditional checking account.
“In fact since introducing second chance checking, we’ve attracted new people to the credit union because they had no where else to turn,” the credit union spokesman said. “Many had fallen on hard times. One individual had health issues that ended up wiping out everything in savings. This member needed a second chance and we are happy to be able to provide it.”
Kucey adds that her credit union offers numerous ways for members to build financial freedom and get back on their feet. “We have a no credit check loan for $600 and also a secured credit card, which provides the member a great way to build credit.”
Additionally, Jetstream has made a name for itself in the community in an effort to build financial literacy and awareness. “We are also involved with a community literacy program, which is a non profit organization for women who are reentering society after being in prison or come from a low income background. Community leaders teach life skills through workshops and I teach the financial literacy portion.”
Convenience May Be the Key for Many Consumers
Patrick LaPine, President/CEO of the League of Southeastern Credit Unions says that credit unions need to take note of what’s going on with big bank’s interest in the underbanked consumer.
He explains that the underbanked sector may not only be low income, but also Gen Y--those who may be uninterested in banking the “old fashioned” way and have found a new method.
“Instead of financial institutions trying to make Gen Y conform to our standards we are going to need to make adjustments to fit how they want to bank with us,” he says.
LaPine says that credit unions are only now starting to realize that there’s a segment of consumers that financial institutions didn’t want to engage in the past but are now suddenly being served by someone else. “The check cashers and Wal Marts of the world are coming into the financial services marketplace,” he says. “For example, consumers can perform a variety of financial services at Wal Mart, which offers an easy, convenient solution that Gen Y and future generations are gravitating toward.”
He explains that Gen Y wants to be mobile and don’t mind paying a few extra fees in exchange for the added convenience. “They are the ‘bank as you go’ generation,” he says. “Banks are seeing this and offering a similar solution through the reloadable debit cards and other convenience driven services.”
“One of the biggest challenges financial institutions face is getting Gen Y into a traditional branch,” LaPine continues. “Plus, some underbanked consumers like the anonymity of something like a Wal Mart branch because you aren’t facing Judy at the teller counter and have to tell her you have a problem. Unfortunately, they don’t understand that a credit union would be more likely to help them out.”
LaPine points to one credit union’s idea as being a possible model for other credit unions across the country. Redstone Federal Credit Union ($3 billion, Huntsville, AL) is opening two storefront looking “branches” in an effort to capture that underbanked segment. In fact the storefronts even resemble the local check cashing store, with one branch located in a tired strip mall in Decatur.
“It looks like a check casher, but once you get inside you get the best of both worlds,” Peter Alvarez, Redstone’s emerging markets manager. The stores will offer traditional checking and savings accounts alongside prepaid cards, money transfer and bill paying. “We wanted to attract people who wouldn’t naturally come to a bank.”
Although Bank Transfer Day provided credit unions with a much needed spotlight, LaPine still believes that convenience trumps all. “Coming out of last fall, there’s more awareness among consumers surrounding the advantages of moving to a credit union and the fee advantages,” he says. “But you see time and time again, people will pay a higher premium for convenience. If we can meet them half way from a convenience standpoint maybe you can get more to convert to a credit union.”