Ask The Experts: Should We Be Concerned About Consumers No Longer Using Banks?
Every two years the Federal Deposit Insurance Corporation (FDIC) makes an accounting of bank customers. In its latest survey, in 2011, FDIC found 28% of American households had no bank account or used minimal banking services. The number was up nearly one percentage point relative to the 2009 survey.
The trend of a growing number of “unbanked” consumers coincides with an increase in the number and amount of fees banks charge for their services – in particular checking and savings accounts. While you can still find free checking at many credit unions and small community banks, a 2012 survey by the Ohio Public Interest Research Group found only a quarter of banks with more than $10 billion in deposits still offer a free checking account.
But instead of switching to a credit union, it's obvious that many consumers are simply dropping out of the banking system. Yes, it's a loss for banks, but are there concerns beyond a financial institution's profit and loss statement?
“We should be concerned with increasing numbers of unbanked, both for society's and the individual's well-being,” said Manferd Peterson, interim chair of the Department of Finance at the University of Nebraska. “Communities that have strong banks with widespread participation in banking are stronger communities.”
He notes a greater proportion of minorities, immigrants, low income and low education consumers tend to make up the unbanked and says banking relationships would help them participate more fully in society. It's also more difficult to establish a credit history without a banking relationship.
Saul W. Adelman, professor of finance at Miami (Ohio) University believes people who are dropping out of the banking system are making a rational decision which should prompt a discussion of broader societal factors.
“The question should be, 'why is the federal government destroying the ability of people to get jobs so they have something to put in a bank and be included in the 'normal' economy,’” he said. “Fewer people saving less money requires the banks to charge more for their services, leading to fewer people having bank accounts. Looks like a vicious cycle to me.”
Richard Grant, professor of finance and economics at Lipscomb University, believes consumers would benefit if there were less regulation of banks. Less regulation, he says, would increase competition.
“Such competition would force banks to compete for customers by offering a better variety and quality of services,” Grant said. “Some banks or bank-like companies would compete for many of the potential customers who are currently unbanked.”
“Generally a more ethical and customer help oriented approach could develop a friendlier and less costly banking system to keep the customer in the bank,” says Surendra K. Kaushik, Professor of finance at Pace University.
Meanwhile, prepaid cards and other non-traditional alternatives have become a growth industry. Todd Shank, associate professor of finance at the University of South Florida St. Petersburg, sees this trend increasing.
“I believe that there is the possibility of exploiting a market niche here that is not being adequately served by our local banks,” Shank said. “The process has begun with companies such as Amscot and others, and the growth of such firms signifies their popularity among consumers that feel under-served by depository intermediaries.”
Brian Davis, clinical assistant professor of finance at Penn State, says he has watched the growth of the prepaid card industry with amazement.
"I think younger consumers find these cards particularly appealing,” he said. “I think that's a real threat to the banking industry, to tell you the truth.”
In the end, banks could be missing an opportunity. Manuel Lasaga, clinical professor of finance at Florida International University, says many consumers who have not formalized relationships with banks could, over the long term, become valuable potential bank customers. It will just take some effort – and foresight – on the industry's part.
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