Products for Unhappily Banked Can Win Over Underbanked, Too

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Next-generation banking products are here, but knowing exactly what to call them is a challenge. They bundle transactions, payments, savings, and money management tools in ways that fundamentally reimagine the banking relationship.   

The trend last summer began with the private launch of Simple, a tech start-up that promises to replace the hassles of a bank account with an elegant white card and a mobile app. Then Chase made a splash with Liquid, the bank's card-based checking account designed to imitate prepaid.

Next, American Express grabbed the headlines with its Bluebird card, sold in Walmart stores and online. This month, GreenDot entered the fray with a beta launch of GoBank, its attempt to leverage its new bank charter to mimic traditional banking services in a more 21st-century package.

While each of these products is structured differently, they all combine elements of checking and savings accounts and prepaid debit cards. The common denominator is a focus on building customer relationships.

Consumers must apply for these products. The bar is set far lower than it is for opening a traditional checking account at a brick-and-mortar bank, but a bit higher than for traditional prepaid products, which are nearly universally available.

Getting the risk screening right is important because consumers can deposit checks into these accounts, primarily by snapping a picture with their mobile phones. These new products are not built around the good-funds model of traditional prepaid, in which the only ways to load the card are with cash or direct deposit. In this way they act more like a checking account, without the ability to overdraft.

What truly sets these new products apart is the overall customer experience. They have intuitive designs and improved user interfaces that are meant to help consumers make sense of their finances while having some fun. Marketing materials are clear and simple, with little bank-like gobbledygook to be found. Mobile access is a major part of the equation.

Simple, for instance, categorizes every transaction, and users can search recent transactions by category to understand spending patterns. They can set savings goals and have funds automatically swept into savings daily. The company has also created a "safe to spend" measure to help customers understand exactly how much money they have available, a dramatic improvement over the inscrutable "available balance" that banks typically provide.

GoBank is going for a lighthearted touch in money management. Through a feature it calls Fortune Teller, GoBank will warn customers when a desired purchase is about to blow their budget: "Remember that time you won the lottery? I don't either."

The price for all of this functionality and fun? In most cases, free.

Bluebird and Simple have no monthly fees. Chase charges $4.95 per month for Liquid, compared with $12 per month for its Total Checking product. GoBank lets customers choose their own monthly fee using a sliding scale from zero to $9, regardless of the services provided. (Think of the "pay what you want" model Radiohead used to sell an album online a few years ago.) By comparison, monthly fees for most traditional prepaid cards range from $3 to $10 per month, plus additional costs for loading funds via channels other than direct deposit.

The storyline is that these products are meant to appeal to unhappy bank customers and to the younger, tech-savvy set, a more "upmarket" segment. But why stop there? Marketed effectively, these products should hold great appeal for underserved households.

Young hipsters aren't the only ones who want to conduct business with their mobile phones. The underserved are also heavy smartphone adopters, and they are more likely than others to use them for banking and payments. Moreover, the business models of these products are focused less on balances than on the interchange revenue from transactions.

More than most, underserved consumers are likely to appreciate the money management bells and whistles that these newfangled products offer. And while consumers may not rate savings as high on the priority list when asked about it in a market research survey, Simple and GoBank each offers intuitive and fun savings features that small savers would appreciate.

To cast a wider net, the new entrants will have to calibrate their underwriting models to make sure they are weeding out fraudsters without inadvertently cutting off access to consumers with nontraditional credit histories.

They also will need to contemplate consumer cash flow issues.  Some cash-strapped consumers need immediate access to their funds. A growing number of prepaid providers are offering check cashing via mobile phone. The customer takes a picture of the check, the check is immediately cashed for a fee, and the proceeds are deposited on a prepaid card. Why not offer customers the choice, after they have snapped a picture of their check, to either deposit the check or cash it?

Some will argue that underserved consumers don't want a financial relationship. While that may be true for some, we shouldn't confuse consumer behavior with consumer preference. Both banks and prepaid companies lament their high churn rates, but their products are often designed and priced in ways that encourage that churn.

While we may yet lack the language to neatly categorize the new products coming to market, it is clear that they represent the future of finance. Let's ensure they are marketed and structured in ways that make them a part of all consumers' futures.

Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. Rachel Schneider is the center's senior vice president of innovation and analytics.

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Consumer banking