What's Pushing Americans Out of Banking?
Demitri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People are abandoning banks. And, for a change, we aren't talking about investors bailing out of the financial sector, as they did in '08 and '09. Those stocks are faring well, with the industry up over 30% in the last year. Instead, it’s American households that are leaving banks and finding other ways to manage their finances.
The FDIC's just published survey found that a surprising 8.2% of U.S. households have no relationship with a bank and are choosing non-bank actors, like check cashing services and payday loans, to service all of their financial needs. This population of "unbanked" American homes was up 820,000 from when the survey was last done just two years before.
To be sure, this jump in off-the-financial-grid citizens is correlated to the weak economy. Joblessness and lack of funds are key reasons why more Americans are closing bank accounts these days. So when the job market improves many of these former customers should find their way back into the industry.
But that's not the whole story. Cost, convenience, and trust issues are also contributing to the exodus. In short, banks are losing these customers for business reasons, too.
We learned last month that bank fees went up across the board this year. From minimum balance requirements, to monthly service fees, to overdraft fees, it became uniformly more expensive to bank in the first half of 2012. In fact, the only number from the fee survey that didn't increase from 2011 was the percentage of bank accounts offering free checking, which dropped from 39% to 35%. Banks are offering their customers less, and charging them more for it. So it's no wonder that more people are quiting their accounts.
But all these extra costs haven't made real contributions to bank profits. Wells Fargo (NYSE: WFC) saw its non-interest income creep up by less than a percent last quarter. And Bank of America (NYSE: BAC) saw a 4% boost in non-interest income thanks to "an increase in service charges." But both companies' fee levels are well below where they were before the new financial regulations took hold. Citigroup's (NYSE: C) non-interest revenue has been falling for three straight years and is 10% below its 2007 high.
Perhaps due to increasing frustration over fees, the second biggest reason listed in the FDIC survey for people becoming unbanked was they "Do not need or want an account." These are people, like the systems analyst profiled in a recent Wall Street Journal article, who said he had "no need, desire or want to go to a regular bank." Like a growing number of Americans, this Microsoft employee told the WSJ that he uses prepaid debit cards instead.
To their credit, traditional banks aren't ceding these customers completely without a fight. Both US Bancorp and JPMorgan joined the prepaid card market this summer. But a customer with a single, prepaid card relationship is much less profitable to banks than one that uses the full line of bank services. While banks can still claim that person as a customer, they can't pretend that his profitability, switching costs, or loyalty are at all comparable.
Lack of Trust
Which brings us to the issue of trust. In my view, the one piece of data from the survey that should worry banks the most is the 8% of the unbanked who left because they "don’t like dealing with and/or don’t trust banks." This segment of former customers is choosing non-bank financial service providers for the simple reason that they have lost faith in the banking industry.
Banks can improve their services and work to turn their products into more compelling values at the expense of profitability. But the path for winning back consumer trust isn't so clear.
The FDIC did the banks a huge favor by collecting detailed information about how their retail customer pool is shrinking partly because of fees, convenience, and trust issues. The question now is, what are the banks going to do about it?
SigmaSwan has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.