I recently visited the community bank down the street. While waiting on the branch employee to generate my paperwork, I noticed information on her desk about rates and the required minimums to open accounts. I asked her about the $100 minimum to open a savings account, which also came with a $5 monthly fee. “Do many people open savings accounts with those conditions?”
I was unprepared for her response: “No, that’s why I haven’t been able to open one. Although I’d like to.” I had to wonder about the commercial viability of account design when a bank’s own employee believes that opening a savings account is out of her reach.
Many financial institutions have turned to account fees to help replace lost revenue streams. Non-interest income is vital to their sustainability, but at a time where most Americans are not saving enough, does it make sense to create barriers that discourage beneficial behaviors like saving?
After years of average consumer savings
barely hitting 1% of annual income, the recession reinvigorated the level of personal savings to 4%. While the economy appears to be improving, according to recent data from the Federal Reserve the average American has yet to experience the economic recovery. In tough times old habits are hard to break, and consumers once again are unable to plan for the proverbial rainy day.
Consider some startling statistics from recent research:
This dire picture extends beyond the 42 million below the official poverty line. Others are walking a financial tightrope, too. 25% of middle income households earning $55,465-$90,000 have less than three months of savings. Given this lack of a safety net, it comes as no surprise that 7% believe they will never retire. With today’s low interest rates, many people believe there is little gain by saving; yet, having a nest egg offers advantages well beyond peace of mind.
What happens when the unexpected happens and an infusion of cash is needed for an emergency? Without savings, choices are limited. Many that previously relied on credit cards have watched as access to unsecured funds dried up: “Analysis by the investment bank Jefferies concluded that since 2009, approximately $122 billion in credit availability to Americans with scores of below 660 has been removed from the market,” according to a recent article in American Banker.
Many consumers with an urgent need will resort to a payday loan. Today, there are more payday lending storefronts in the U.S. than McDonalds and Starbucks locations combined. While some states are capping allowable interest rates, some of these lenders charge more than 400%. And as online and mobile access become ubiquitous, so has internet-based payday lending. By 2016, Internet loans will make up roughly 60% of payday loans, many of which are not governed by U.S. regulations.
While representatives of the payday lending industry state they are providing a needed service that their customers willingly purchase, a growing number of voices are challenging that position. “They are stripping the wealth from our communities,” admonished Iowa State Senator Matt McCoy. In an American Banker report, Kat Taylor, CEO of One PacificCoast Bank in Oakland, California said payday lending, “is a death trap that ruins individuals, households and whole communities and is the scourge of our time…We need to be in the business of creating bank customers, not destroying bank customers."
I think we can all agree that there are a number of social benefits derived from helping consumers avoid a cycle of debt, prepare for emergencies, and establish and cultivate solid credit habits.
So what can an FI do? Here’s a short list of ideas:
Doesn’t it make sense to design products that consider the overall customer experience, including products and services that support your members’ and customers’ fiscal fitness? What are other ways FIs can help address these issues? After all, isn’t it possible for FIs to do well by while doing good?
Resources
Center for Financial Services Innovation
FDIC’s Economic Inclusion Site
The National Federation of Community Development Credit Unions
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