You provide super powers for account holders. Really. Consider your checking account. It enables someone to pay anyone they need on a recurring schedule or directly in the moment. Plus, the funds are guaranteed safe against fraud and theft.
Sure, we take it for granted, but you are providing an amazing service. Imagine if we all had to carry gold or even use cash for every kind of purchase. Besides being a real annoyance, theft would be rampant. Keeping your liquid assets separate from the physical you is essential.
A banking system where we trust our funds are available changed society and helped create economic classes between “dirt poor” and “royalty”.
Yet your super powers aren’t absolute. In this series, we focus on ways you can empower your member’s financial position, leading them to better lives. Here, we look at checking’s role in that effort.
First, we need to address the 55 million strong elephant in the room: The unbanked (or underbanked).
Quality Financial Access Doesn’t Include Everyone
Most Americans have a checking account to use for spending. However, for 25% of US households, a checking account is either a costly challenge or an unachievable goal.
Why? For the majority of unbanked or underbanked individuals, they simply don’t have enough money to keep an account. Money that comes in goes right back out.
I’m all about education, but as said while wearing my Jedi robes (video), “you cannot teach people out of a tough financial situation.” Combining your financial literacy with active consideration for their challenges is how you build empowerment.
For those reading from CDFIs, a lot of this might sound familiar. We believe there’s a path for “regular” institutions to adopt some of their practices, and add others, while remaining profitable.
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It’s Expensive to be Poor
You’re probably saying, “hey, wait, our checking account has no monthly fees or minimum balances!” My own credit union has those policies. They’re less common in banks. And you may also have other “free-tures”. This is all helpful.
However, some institutions have “hidden” fees for a range of actions, often taken by people with a challenging financial history. Do you charge for closing a recently opened account, inactivity, ATM withdrawals, or wire transfers? Or anything else?
If your answer is no to all of the above, congratulations, you’re already in an exclusive group. Of course, we didn’t include the enormous penalties for the occasional NSF or OD.
I get it. Each of these services (and maintaining the account itself) has a cost.
This is also a cash-heavy group, meaning deposits are dependent on accessing your branch during business hours. Wasn’t there some global event recently that made physical access more difficult?
Putting aside the huge effects of COVID-19, let’s just say cash deposits over the weekend come with their own set of difficulties. Of course, withdrawals can occur, triggering those overdraft fees, especially if the system doesn’t update balance real-time.
There might even be fees for copies of checks and statements.
Combine this with the trend of closing branches in lower income areas, the underbanked join their unbanked brethren at high-priced neighborhood alternatives. (Yeah, DEI covers more than just your workplace practices.) You know the places: Check-cashing stores and payday lenders.
You know your community financial institution is a better choice, but for them, are you really?
Are Bankers in the “Penalty” Business?
“10 yard penalty. Repeat 2nd down.”
When an overdraft can trigger a “1700% APR loan”, what other term could there be? The majority of purchases triggering overdraft charges are less than $24, while the fees average $34, according to the CFPB.
Most repay the funds within three days. That translates to an annual percentage rate of 1700%. Payday lenders “only” charge fees at 300-600% APR, according to the Berkeley Economic Review.
Unsurprisingly, these costs can add up, especially for the one in five people with overdraft protection who overdraw their account more than ten times per year.
And it’s not just the members who could be forced to spend. Navy Federal settled a class-action lawsuit about repeated NSF fees for $16 million. About 700,000 members will receive a refund for fees imposed.
Financial Institutions Need Fees to Survive. Right?
Surveys indicate up to 40% of all checking accounts are not profitable. So it’s a loss leader for other, profitable services. Like what? Like penalties through fees. Each of which help pay for all those unprofitable accounts. (I’ll be honest; accounts like mine.)
Margins on traditional products are tight. Interest rates used to have lots of room for profits, both to the institution and members. Remember savings accounts at 4%? Ha! Rates are at historic lows, with the Fed advising they may remain there for the foreseeable future.
So fees make sense to recoup lost interest revenues. For the institution. Surveys show that consumers hate bank fees. Is there an alternative? Or maybe some “friendlier” ways to generate income, deliver value, and drive financial empowerment?
First, let’s look at the traditional landscape today.
Checking Accounts and Revenue Generation
What appears when you search for “checking accounts”? Go ahead, I’ll give you a moment to check. (Get it? Check? There’s a fine line between humor and crazy. Where am I? Never mind, don’t answer that.)
Ok, all set? Great. What did you find? Within that myriad of results, you’ll learn most institutions are offering the same types of checking that they have for over half a century. These are familiar to all:
This is where it all starts. It’s a place to put money. No perks. Just the, as it’s called, the basics. Account holders receive a free debit card, use of your ATM network without fees (including any groups to expand reach), e-statements, and optional paper checks.
They can log in to mobile or online banking, maybe use bill pay, and scan paper checks for deposit. Nearly everything else comes with a fee. The account may also have a minimum balance, a monthly fee, and/or transaction minimums.
Despite the shortcomings, it’s still better than a check-cashing store or payday lender. But only if the funds are available quickly (that’s the main driver keeping people going to the former businesses).
How long does it take for a deposited check to become available balance? And for members using ACH with their employer, do you make those funds available a day early?
Your checking program is where loyalty, engagement, and onboarding really begin. So what are you doing to ensure it’s firing on all cylinders? This Cheat Sheet will give you 4 quick, actionable steps to make the most of your checking program.
Get the Cheat Sheet
While the name hasn’t changed since real interest income existed, it’s way past time. Typical interest rates in 2019 were .04% and 1.00% for brick-and-mortar and online institutions, respectively. If you’re reading this, you’re part of the former category. And it’s lower now.
As of 2016 (the most recent available at time of writing), the median checking account balance was $3,400. Even if you found an account with 10x the typical rate, at .4%, you’d receive a whopping $13 a year in interest.
Your lower-income members have smaller balances, so they’re less able to make money from money. If household income is $45,000, the account holder makes $8 a year on their $2,000 account balance (and nearly a dollar! if the rate is closer to the national average).
Not really high-yield.
If you are higher-income (with higher balances), you don’t care about checking account interest. Mainly because you have access to other investment tools which can offer higher returns. That being said, we did find a credit union with a compelling high-yield account.
Here’s a CU Doing Real High-Yield Checking
Bay Area Credit Union has a bonus cash checking account offering 2.00% APY (as of writing) on balances up to $10,000. Frankly, that’s great in today’s rate environment. It falls to 0.41% on anything above $10,000, still 10x the national average.
To provide these rates, Bay Area CU and other institutions have a few requirements. In their case, every month, the member must have 12 debit card purchases, 1 ACH, eStatements, and sign into online banking. Don’t meet one of these? You pass on that great interest rate.
Put simply, they’re willing to offer up to $202 a year in dividends per account (assuming you meet qualifications every month and maintain a $10,000 balance). Beyond, you can earn up to $4.10 annually for each $1000 beyond the $10,000.
For the average checking account size (assuming a member meets their requirements every month), they’re looking at $68 in dividends, or about $5.67 a month.
Empowering With Interest
From a financial empowerment perspective, if you have more than $10,000 in your checking account, it’s time to find better places for those funds that earn you higher returns. However, for guaranteed returns, Bay Area CU’s promotion is an empowering option for many.
Just realize that even with these above-market rates, you’re not building wealth, rather, it sustains what you have. It barely beats annual inflation (1.8% in 2019). For those whom every dollar matters, it feels like more from the promotion.
While high interest rate marketing is about growing checking account size and usage, a true financial partner would also clearly present the average and maximum dollars this can create. Otherwise, it can be misleading to people who haven’t run the calculations.
Sidenote: If you’re willing to forego Google, you can switch to Bing (Microsoft’s search engine), which has Rewards, or points for search actions. Used daily, you can earn about the same value in rewards dollars as that average-sized checking account at 2.00% interest. Without keeping $10,000 in an account.
Specialized Checking Accounts
These are accounts which have unique features for those who meet certain eligibility criteria. They include all the features of Basic Checking, and stand out with extras tailored for their specific markets. Some categories we see include:
- “Senior checking” account for those over 55 (or 65), with reduced or eliminated fees for a range of services. Some include paper options of statements and checks for a generation more comfortable with them than online banking.
- “Starter checking” account for young people, often with interest rate boosters on the first $1000 or so. Eligible for a certain number of years or until reaching a specific age. Requires a parent account if under 18 (helps build family loyalty).
- “Refresh/restart checking” account for those working to rebuild their credit. These often come with fees to (presumably) account for the higher risk. Consider this for people used to only using check cashing and/or payday lenders.
Using these traditional account types, including high-yield, there are two main ways to drive income:
- Interchange fees: “Swipe revenues” when the debit card gets used online or at a physical location. Income may vary depending if the account holder chooses debit or credit for processing.
- Funding loans: Bring in money to lend it out. While staying within safe boundaries, you can produce loan interest income by lending cash assets back out. This is dependent on demand, credit worthiness, and interest rates.
That’s it? Income generation really is limited. And it’s not like enough people will order boxes of checks to change your fortunes.
Yes, you may notice we left out overdraft and NSF fees. Because while we understand the need they serve, we don’t believe they should be seen as revenue sources.
So if 40% of checking accounts are unprofitable, and that’s including overdraft and NSF fees, what can you do? Can you generate substantial revenues without being punitive towards account holders least able to pay?
Or, to the point of this article: Can your checking accounts work to create opportunities for financial empowerment while remaining sustainable as an institution?
Subscription Checking, aka, Value-Added Checking
Hot off the press! Never been done! New to everyone!
Not quite. This “new” form of checking has existed for years. In fact, hundreds of financial institutions leverage Subscription or Value-Added Checking for their account holders.
Disclosure: Yes, we offer a Value-Added Checking product. We also share a wide range of educational content on the topic. You know we’re all about honesty. In this case, we believe this is worth considering as part of your financial empowerment effort. Our “why” is below.
What is Subscription/Value-Added Checking?
Put simply, it’s a hybrid account. Using your basic (that free one from earlier) account to start, the program adds a full suite of money-saving benefits which may include, but not limited to:
- ID Theft & Recovery
- Cell Phone Damage Insurance
- Cash rebates on certain purchases
- Double warranty on purchases
- $10,000 of AD&D coverage
- Discounts on Vision & Dental care services and Prescriptions
With the right setup, it can also build on specialized accounts to provide the “ultimate checking experience”. For simplicity, most institutions get it going with a standard account.
Using the Netflix, Amazon Prime, Hulu, Spotify, HBO, etc. model, you charge a reasonable amount per month for members to “subscribe” to the account. Yes, they pay, but it’s a choice, instead of a penalty. In addition, pricing tends to be similar to those. But we’ll get to that.
How Does It Empower Account Holders?
Great question. Let’s start with the basics. Remember, just because you’re a financial institution offering financial products, you can still have a major impact on the rest of people’s lives! A Value-Added Checking account can extend your influence beyond its normal scope.
Any financial plan, especially for those already financially vulnerable, can experience huge setbacks by unexpected costs. A common coverage in these accounts is cell phone damage. According to Apple, an iPhone screen replacement can cost up to $329!
Sidenote: I’m a big fan of the tempered glass screen protectors. They’re only a few dollars each and can “take the hit” for your phone if it goes down. It’s not infallible, but can reduce the chance of needing expensive repairs, even with coverage.
Other protection surrounds the time and financial cost of ID Theft & Recovery. By providing regular monitoring, people can get notified of credit report activity, and also learn how that impacts their financial strategies. Then, covering costs of recovery if a theft does occur.
You’re all about protecting your members. Including such a service enhances your story, and makes a real difference in peoples’ lives.
Sidenote: Yes, some institutions sell identity monitoring. Frankly, it’s expensive for what you receive, especially when compared to something like this, which, for less money, gives account holders much more.
Saving Money & Expanding Reach
These types of accounts also provide savings on a wide range of services. BOGO at the local yogurt shop? Provided by your institution. Discounts on their prescription drugs (even if they don’t have insurance)? Another service you offer to protect and empower members.
You know that financial empowerment is about more than saving money. It’s getting the most for every dollar you do spend. And understanding options, reasonable pricing, and more if the purchase is necessary. All provided under the branding umbrella of your institution.
By becoming top-of-mind for account holders more often, it opens the door for additional engagement, trust-building, and education efforts.
What are the Institution Benefits?
You’re about building financial stability and success. But not just for your account holders. A sustainable financial institution has to stay in business to continue serving. And we already suggested minimizing the impact from overdraft and NSF fees…what now?
A Value-Added Checking system provides a source of fee-based income that members choose to pay. Providing value above and beyond its costs, experience shows 80% of account holders transitioned from a free account will opt into the benefit-laden service.
Most institutions charge around $5-6 per month, similar to “maintenance fees” on accounts that just..exist. And those funds are where you can use this to further empower.
For an institution with 50,000 basic checking accounts, they can expect around 40,000 choosing to retain the Value-Added platform. The average margin is $4 per account, per month. This allows the institution to increase non-interest income by $160,000 monthly.
That works out to almost $2,000,000 per year.
Some institutions also used the differentiating benefits to increase their new account openings…by as much as 400%.
Yes, it is a marketing and sales effort for your institution. But what’s important is to see how it can reduce your need to further burden those least able to pay. And at the same time, help empower those who choose to take advantage of your additional benefits.
Imagine that $2 million in new, recurring annual income. What fees could you reduce or eliminate? (Or, brainstorming here, provide a “scholarship” for your most financially challenged members to get the account at no charge…)
I’m sure you have even better ideas.
Financial Empowerment Is A Continuous Journey
Financial empowerment comes in many colors and flavors. Our goal through this series is to highlight those not often considered. Here, we looked at Subscription/Value-Added Checking. It’s a topic we cover extensively here in the Learning Library.
Once again, full disclosure, we do work with a company providing Value-Added Checking. You can see them and others serving the industry in our 5 Best Banking Industry Checking Providers piece.
We recognize this may or may not be a fit for your institution. However, we believe that having more information on a range of topics only helps to further your mission. That way, you can make the best decisions for your institution and members.
As always, be sure to Subscribe to the Learning Library to get weekly insights like these. And, until next time, keep it honest!
Blogger. Speaker. Part-time Jedi.
Focused on helping your bank or credit union grow in the face of emerging challenges.