In February, the Consumer Financial Protection Bureau urged banks to make available “lower-risk deposit accounts that help consumers avoid overdrafting.” The agency’s laudable goal is to increase access to checking or other accounts – especially for millennials, the financially vulnerable, the unbanked and other individuals who cannot afford these accounts as currently designed. According to the Brookings Institution, one-third of American households live paycheck to paycheck.
The CFPB rightly identifies overdraft and other fees as obstacles for many to afford checking account access. Checking account fees often drive consumers – particularly the most vulnerable – out of the banking system and toward inferior and even more costly financial services. Solving this problem is an important opportunity for banks, credit unions, fintech companies and other providers to build the right kind of relationship with millions of customers. Rather than surprising consumers with an overdraft fee or other unexpected costs, a more effective approach is to build in a more transparent and upfront pricing system – like a subscription model – for checking accounts.
But why stop there? Reimagining deposit accounts is not just an opportunity to help customers avoid overdraft and other fees. It’s an opportunity to completely rethink how banks meet customers’ total transactional needs.
According to our data, 54% of checking account customers are in poor financial health. So there is a tremendous opportunity to build transactional tools that truly meet customer needs, and in turn, uncover new sources of profitability.
Today, a well-designed deposit account is a safe and convenient repository for wages and benefits received, offering a way to deposit checks with options for immediate liquidity. Services like Ingo Money or Fiserv offer instant deposit capabilities that facilitate immediate access to funds, for instance. Such accounts can support customers’ spending decisions by providing clear and transparent information with customizable product features. They provide a way for customers to plan and save, helping people build a small buffer to absorb unexpected expenses that hit at inopportune times. And they help foster a relationship between the customer and the provider – an important but often overlooked point. Building trust can open the door to additional products down the road, providing revenue opportunities for the provider and improving the financial health of the customer.
A next-generation slate of deposit accounts could offer consumers even much more, including affordable small-dollar credit options; algorithms that help customers smooth their volatile income and expenses; and proactive, digital nudges on daily financial decision-making.
A handful of providers are already designing products of the future with these features. We are now witnessing constant experimentation and innovation with transactional tools through mobile apps and neobanks whose business models don’t rely on fees that annoy or alienate customers.
Even, a financial stability app, turns a consumer’s inconsistent income into a steady salary. When more money rolls in than normal, the app will move the surplus money into an account to be available later, or provide interest-free credit when there is a deficit. Digit is an automated savings tool that helps people save without their needing to think about the chore. The app partners with banks so funds are FDIC-insured. Some bank products already have next-generation features too. Fifth Third’s Express Banking offers immediate funds availability, tiered pricing, no monthly service charge or overdraft fees, and no credit score requirement. The Regions Now Card is a prepaid card option that has no monthly fee, no minimum balance requirement and mobile deposit.
Here’s what this group of innovators (and others like them) have in common: they’re looking beyond the challenge of overdraft to the whole range of Americans’ transactional needs. They’re thinking bigger, and in turn, opening up new pathways to profitability. They’re also gaining a competitive advantage by designing products for a future in which a checking account is much more than it is today: a tool to streamline, automate and facilitate the management of a customer’s day-to-day financial life.
That’s an account worth paying for.
Rebecca Ahlers and Elizabeth Vivirito are managing directors at the Center for Financial Services Innovation.