Zywicki in American Banker: Hard to Get Something Simple from a Bank

There is little evidence that services can be delivered profitably to underbanked consumers by traditional banking channels says Professor Todd Zywicki in an article appearing in American Banker.

"Banks are corporations - they do mass-produced stuff just like GM, but there are people who have different needs, and it is not obvious that banks are suited to meeting those needs," he says. "They end up being tripped up by hidden fees, and the hassle of dealing with a bank. They want something simple - and it is very hard to get something simple from a bank."

A recent survey report from the Federal Deposit Insurance Corporation concludes that more than a quarter of U.S. households are unbanked or underbanked, with just under 8% of households without access to a bank account. Evidence suggests, though, that some percentage of the population has little need for banking services because they live paycheck to paycheck. Many of those households might better be served by nontraditional financial services providers, rather than by banks.

When Banks Aren't Really What Underserved Consumers Need, American Banker, June 10, 2010. By Rob Garver.

"One of the arguments typically made for bringing a consumer into a traditional banking relationship is that the nontraditional providers fail to offer them two things that are vital to financial health: the opportunity to build wealth and the opportunity to build a credit rating.

"'Building a credit score is a crucial part of building wealth over time,' said Rachel Schneider, innovation director for the Center for Financial Services Innovation, a nonprofit affiliate of ShoreBank. 'Even a robust transactional account can't help you do that.'

"Again, let's state the obvious: It would be desirable for every person in the United States to have, at the very least, a few months' worth of living expenses socked away in a money market account, and to have access to reasonably priced credit when they need it.

"However, for many of the unbanked - often living paycheck to paycheck - building substantial wealth may not be a realistic goal. For a good chunk of this segment, the sort of nest egg that belongs in a bank-administered individual retirement account or other long-term savings vehicle may be out of reach."

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