Young consumers are so turned off by the prospect of overdraft and debit card fees that some are turning their backs on financial institutions.

Banks, in fact, face the significant risk that the trend becomes more widespread in the wake of the recession and a series of jolting financial-services developments that hit young adults harder than other groups, according to Ron Shevlin, an analyst with Aite Group.

These consumers, most of them younger than 30, often are college-educated and have earned solid salaries at some point, but they also got burned by costly overdraft fees more than once and “had a strong reaction against it,” he says.

Negative publicity about banks introducing, and then retreating, on plans to introduce monthly debit card fees also has made them leery of the costs associated with checking accounts, Shevlin suggests (see story).

“I call these younger consumers that have walked away from banks ‘the debanked’ because they could easily have a relationship with a bank but they have deliberately opted out,” Shevlin says. “This is very different than the concept of ‘unbanked’ people who never banked or lack the resources to get started at a bank.”

In analyzing data from a survey Aite conducted online last year involving 500 consumers who use alternative financial-services products, Shevlin noticed “about 15%” of those who said they had used check-cashing services, prepaid cards or payday loans within the previous year did not fit the common perception of unbanked consumers. He notes that the sample is not representative of the overall U.S. population.

This smaller group of consumers included “a good chunk of people who are college-educated and have decent income, but they don’t trust banks and would rather pay fees to alternative financial-services providers as they go than open a checking account,” Shevlin says.

Some of the so-called “debanked” consumers likely were in school or were moving from job to job during the recession and got hit by overdraft fees “at a time they could least afford it” and are averse to taking that risk again, Shevlin theorizes.

Avoiding banks could be a long-term habit for these consumers, and that threatens banks’ potential market share, he suggests.

For such consumers, routinely using a reloadable general-purpose prepaid card with a monthly fee for basic financial services is superior to even the lowest-cost checking account because of its predictability, Shevlin says.

“The perception among ‘debanked’ consumers seems to be that it is actually safer to avoid banks and pay various upfront fees for check-cashing, prepaid cards and short-term loans rather than take the risk of getting surprised by bank fees,” he says.

Indeed, the bar for getting a checking account is fairly low through some providers. For example, First Convenience Bank, a division of Amarillo-based First National Bank of Texas that is opening branches inside Walmart stores in Arizona and New Mexico, requires only $1 to open a checking account and receive a debit card. But the customer must maintain a minimum balance of $100, enroll in direct deposit, or conduct at least five debit transactions per month for the account to be free.

Consumers who use reloadable general-purpose prepaid cards for making routine payments and transferring funds usually pay between $5 and $9 per month for such services, Shevlin says. But some recession-battered users believe it provides “better discipline and security for them than a bank account,” he says.

Banks that are counting on young, former bank customers to re-embrace their services eventually may be waiting a long time, Shevlin warns.

“Banks need to wake up to the fact that they may have lost a chunk of prospective customers permanently and start working on rebuilding their image with younger consumers by developing new products that meet their needs,” he says.

Some banks, including BB&T Corp., already are recognizing the gap and are rolling out the red carpet to younger consumers, including making prepaid card products more attractive, he notes (see story).

“Timing is important because we are at the point right now where the prepaid market is becoming more competitive, and it remains to be seen how both banks and prepaid card marketers cater to young adults, which are a growing market,” Shevlin says.

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