Adding Salt to Wounds: Consumers Shun Banks for Alternatives

If you needed further evidence that the public holds the banking industry in very low esteem – or perhaps simply considers it irrelevant -- consider this statement from Charles Russell, a 43-year-old Microsoft employee whose family income is $230,000, according to the Wall Street Journal, which recently interviewed him. “I have no need, desire or want to go to a regular bank,” Russell told the Journal.

According to an article that appeared earlier this week, “[Russell] has no bank account, having dumped it due to irritation over fees and overdraft penalties. Instead, for more everyday transactions he uses a debit-card offered by NetSpend Holdings, Inc.”

Pointing to the growth of prepaid debit cards offered by non-banks such as NetSpend and Green Dot Corp. , the Wall Street Journal focused on this trend as evidence of expansion of the number of unbanked people, citing the economic downturn as the main reason for this growth. The article also referenced data from the Federal Deposit Insurance Corp. released this week revealing that 8.2 percent of U.S. households (almost 12 million households) are managing their finances without a bank, compared to 7.7 percent as reported in its 2009 report.

If I were a banker, it would be tough to know whether to take a glass-half-empty or glass-half-full view of this information. On the pessimistic side, it seems to reinforce a) the current unpopularity of the banking industry and b) the advantages unregulated entities such as Green Dot, NetSpend and other technology-based players might have in grabbing a share of peoples’ wallets. On the optimistic side, this seems like a great opportunity to rebuild relationships and tap into an underserved market. The Wall Street Journal article references initiatives from prominent banks including J.P. Morgan Chase and Regions Financial around prepaid debit and other offerings targeted to lower-income individuals.

The buzz at this week’s Finovate conference in New York was largely around personal financial management and related tools that, in addition to helping consumers manage their finances, also have the potential to strengthen the bonds between banks and their customers. It’s clear that just as there are more ways than ever for banks to enhance these relationships, there are other suitors waiting in the wings who just might be more persuasive.

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio