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No More Free Checking, More Unbanked

Adam Rust's picture

Posted June 21, 2010

Bank of America's decision to transition away from free checking means that even more Americans will opt out of a relationship with a mainstream bank. Most likely, those consumers will join the 80 million Americans that meet one of the definitions of "unbanked."

Bank of America plans to introduce new accounts that include a monthly service fee.  Unless a customer is profitable, meaning that they keep a large checking balance or that they use other B of A Products, they are going to face the prospect of paying $10 a month just to have the ability to write checks.

Banks have put some effort into courting the unbanked, but their efforts have not been paying off. The Bank On initiative started off well in California, but it has never become a nationwide success. In North Carolina, bankers killed the Bank On program.  Community groups, whose buy-in is necessary in order to drive unbanked households into the program, refused to agree to tell their clients to use the Bank On product unless it was free of overdrafts. The banks didn't budge. They weren't willing to even offer one overdraft refund per year.

Regulatory reform has brought some change to those positions. Bank of America's response is to punt. They're not the

only one, though. Fifth Third blazed the trail by eliminating free checking, minus some caveats, last year.

Plenty of Americans have already chosen to opt out of the banking system. The threat of an overdraft is enough. Now, with news that they may have to pay $10 to $15 per month just to write a check, means it will make less sense for households on a tight budget to have a checking account. That should mean good things for check cashers.

It is a problem for the rest of us, though.  While it does cost some money to process a check, it saves money for suppliers and consumers. My home town is a good example. Like many communities, the recession has constrained the budget for schools. Teachers face the prospect of being laid off, and classroom construction is on hold. In the face to those problems, principals released a line-item budget. It showed that the District was spending $36,000 per year on paper checks. Many of the school system's employees don't have a bank account with which to accept a direct deposit. In lieu of that, the District prints a check and then those households take it to a local check casher. It costs them more per check, and it costs the District to print and distribute those checks. It is a loss for everyone.

The prepaid debit card product can work for those households. It should be able to operate with fewer fixed costs, both in terms of the expenses incurred by the financial institution but also in terms of the ultimate fees that consumers experience in the end.

Who is going to have that market? It looks like Visa and Mastercard will serve as utilities to the new system. PRBC and a few other speciality credit scoring firms may develop niches as underwriters of thin file credit. Marketing organizations like Net Spend, Account Now, Ready Debit, and others are going to play a role in finding consumers and driving deposits.

The catch, though, is that only a few banks appear ready to take this market. They include MetaBank, First Bank of Delaware, Urban Trust Bank, Columbus Bank & Trust, HSBC, and GE Money Bank. With the exception of the last two, these are obscure names. Even more problematic is that none are complemented by a national branch network. These are stand alone institutions.  Most have fewer than 25 branches, and most are limited to just one or two states.

It is one more nail in the coffin for the Community Reinvestment Act. Although these cards will serve low-income consumers across the country, these banks are only going to have assessment areas in a handful of cities. Moreover, places like Sioux Falls, Wilmington, Delaware, or Salt Lake City have a demographic mix that contradicts the nature of these communities in most places.

But the larger problem is that there is not going to be adequate competition in this market. The fees for debit cards are high. It costs almost $6 to load a MoneyPak in some places, for instance. The cards charge a fee to use an ATM, on top of the one that goes to the host ATM bank. No one is stepping into the void, save for these small players. Are the regulators coming up with an alternative? True, there is the Payments Center at the Philadelphia Branch of the Federal Reserve. The Center for Financial Services Innovation held a conference on the unbanked last week. There's a lot of work to do, though, and with the news that B of A is dropping free checking, the pressure is quickening.