Banks are starting to make a bigger play for a market they’ve long ignored: people without a traditional bank account.
The latest company to aim for customers outside the financial mainstream is TCF Financial. The Wayzata-based company is rolling out a service called ZEO at its 342 branches Monday that enables customers to cash checks, start a savings account, deposit money directly to a reloadable prepaid debit card and pay bills — all without a standard checking account.
The services are sold as a low-risk way for customers to disentangle themselves from the world of check-cashing firms and payday lenders. There’s no minimum balance required on the savings account and no chance of overdraft fees.
But they are also a way for banks, in an era of moderate revenue growth, to attract millions of new customers and drive traffic to branches.
“We’re seeing efforts by traditional banks and credit unions to create new or tweak existing products to market to a population that is not traditionally served,” said Tracy Fischman, director of Prepare + Prosper, a St. Paul nonprofit that helps low-income people with their taxes. “There’s a growing recognition, and I think there’s also growing pressure from policymakers.”
Earlier this year, Richard Cordray, director of the Consumer Financial Protection Bureau, wrote a letter to the nation’s 25 largest banks, urging them to make accounts that don’t charge overdraft fees more broadly available.
Nearly 10 million American households have no relationship with a bank, according to the Federal Deposit Insurance Corp., and another 25 million households are considered “underbanked,” meaning they have a bank account but still make use of check-cashing outlets, car title and payday lenders.
In the Twin Cities, about 223,000 households operate completely or partly outside the financial mainstream.
Trying to stay afloat without a solid banking relationship can be expensive. It’s estimated that Americans who are underserved by banks spent $138 billion on fees and interest in 2014.
Families with between $20,000 and $25,000 in annual income typically spend between $1,100 and $2,400 per year on fees and interest that wealthier people don’t pay, Fischman said.
Banks have taken notice of the growing opportunity among those who don’t use banks. So far, the most ambitious attempts to reach them are coming from regional banks.
Last year, Cincinnati-based Fifth Third Bank rolled out a service called Express Banking, which offers a checkless account with a debit card, direct deposit and check-cashing with no minimum balance requirement and no chance of an overdraft. A Cleveland bank, KeyBank, has offered a checkless account for over a decade that doesn’t charge overdraft fees.
Financial technology firms have been the first to get into offering loans to higher-risk borrowers, said John Thompson, of the Center for Financial Services Innovation. Firms like Opportun, Ascend and LendStreet offer loans to customers who might struggle to qualify for financing at a traditional bank. He also highlighted a firm called Digit that offers an automated way for customers to save money.
“For a long time the banking system wasn’t working for all consumers, so there’s benefit in trying to change that,” Thompson said.
TCF started kicking the idea for ZEO around in 2011 and got serious about developing it a year or so later.
Public pressure for banks to reach more of the underserved has picked up in recent years, but plans for ZEO preceded that and the motivation isn’t altruistic.
“Our development path and the larger dialogue have just nicely coincided,” said Geoff Thomas, head of product development for TCF. “We’ve been in development for a lot longer than the cry for this product has been out there.”
Existing customers have asked for reloadable debit cards so they can portion out their vacation spending or give their college kid a debit card.
And the savings accounts and reloadable debit cards of ZEO should help build TCF’s core deposit base, which would allow for more lending. The new products are also one of several strategies for driving traffic to the bank’s branches, which helps maximize the value of the real estate. Offering mortgages and credit cards at branches are other ways to accomplish the same goal, said Craig Dahl, TCF’s chief executive.
And while altruism isn’t the goal, one reason for adding this type of product is to reach new customers, the type who don’t use a traditional bank account, and build a stronger connection with them over time.
“As customers grow their relationship with us, they have the opportunity to seamlessly use our other banking and credit products,” said Michael Jones, TCF’s executive vice president for consumer banking.
Consumer advocates welcome the new attention on the unbanked. They caution, however, that financial firms should work to create a clear user experience and resist the temptation to bury fees in the fine print. Customers want to easily track their finances, preferably on their mobile phone, and know exactly what’s happening.
“They want certainty, they want control and they want transparency,” Fischman said.