Given the right conditions, banks can offer transactions accounts to otherwise unbankable individuals, according to a study released by the FDIC last week during the semi-annual meeting of the Economic Inclusion summit.
Over the last year, nine banks and thrifts offered transaction accounts modeled by the FDIC's SAFE Accounts pilot with the goal of offering transparent and affordable banking to underbanked and unbanked consumers.
Now that so many banks are putting hurdles on to the basic free checking account (higher credit
score minimums, higher average balance requirements), the SAFE account would appear to provide an alternative to the alternatives - to using a prepaid debit card or to withdrawing entirely from the formal payments system.
The template called for accounts with very low opening balance requirements, free automatic savings, online bill pay, electronic statements, a minimum balance of one dollar, and no overdraft. Checking accounts could not have a monthly fee of more than three dollars. All of the accounts had to have the option of using direct deposit.
The institutions participating were Bath Savings (Bath, ME), Citibank, Cross County Savings Bank (Middle Village, NY), First State Bank (Union City, TN), ING Direct (Wilmington, DE), Liberty Bank and Trust (New Orleans, LA), Pinnacle Bank (Lincoln, NE), South Central Bank (Glasgow, KY), and Webster Five Cents Savings Bank (Webster, MA).
In many cases, the banks gave the accounts to customers that they would otherwise had to have rejected because of their credit profile.
- 662 and 2,883 checking and savings accounts opened, respectively.
- Retention rates of 81 percent and 95 percent, respectively, through the end of the pilot.
- Average opening balance for checking was $244, with an average monthly balance of $243.
According to the FDIC, the banks said that the cost of offering of a SAFE Account was low, given that the accounts had no paper checks.
Looking back on the pilot, board members from the Economic Inclusion Committee praised the results but expressed concern that going to scale would wither under the headwinds of the marketing budgets at the national prepaid debit card firms. From the comments made by representatives of the participants, most of the marketing costs were limited to the time taken to train tellers about the SAFE account alternative.
Given that nine institutions could only sign up approximately three thousand accounts, this insight addresses a very legitimate shortcoming. Its not insurmountable, of course: banks could put money into marketing these accounts. Ultimately, institutions like ING and Citibank could crush any of the comparatively small prepaid firms. That is not apparently on the table right now.
I think the fidelity between average monthly balances and average opening balances ($244 and $243) says something important about offering credit. Often, people say that a short-term loan can serve as solution for the occasional cash flow shortage. In this case, people were not growing balances but merely sustaining at the same constant level. This would suggest that offering credit is very problematic.
Some advocates have been critical of accounts that do not offer paper statements. In this pilot, consumers could give their consent to have an electronic statement.