Even as the profitability of checking accounts continues to decline, the competition for checking becomes increasingly fierce.
Consider these following recent actions: American Express and Walmart launched Bluebird accounts. BBVA acquired Simple and Bank of America piloted a checkless checking account. All of these activities should be a call to action for the credit union industry.
First, consider the Bluebird account. With more than one million Bluebird accounts opened, it would rank as the third largest credit union in regard to checking accounts. Not sure Bluebird is a checking account rival or an extra account? Almost two out of five Bluebird accounts have direct deposit. These are not likely secondary checking accounts.
Simple is an online-only alternative offering basic checking account services through a prepaid debit card targeting the needs of Gen Y consumers although not limited to them. It has attracted 100,000 accounts over the past several years and earlier this year, was acquired by BBVA.
For a modest monthly fee, the Safe Balance account launched by Bank of America offers full access to online banking and mobile banking but does not offer paper checks. What is the attraction of this account? The promise of no overdraft fees. Consumers, especially younger ones, have come to be very concerned about being hit by hidden costs associated with free checking accounts, and the revenue generated through overdraft fees are a prime example.
The point is that competitors are placing significant bets on the checking product, even as the profitability of checking declines. They are looking for ways to differentiate, either around technology or value. The reason is simple. Checking is the gateway to the consumer financial relationship.
Household deposit and loan balances tend to be consistently higher in households where a checking account is present and the profit potential is much greater. A consumer's primary financial institution is tied most commonly to where their checking account resides. Most of the new technologies deployed or being deployed including online banking, mobile banking and tablet banking, have their most frequent interface with the checking account, according to research from Raddon Financial Group.
One challenge that the credit union industry must face is appealing to Gen Y, also referred to as millennials, born primarily in the 1980s and 1990s. Raddon research is showing that this generation is increasingly opting for the largest banks for their checking accounts due to convenience and a perceived technology advantage that these large banks offer.
This is a crucial concern as these consumers, coming of age financially, represents the lifeblood of the industry going forward. This is the generation that is buying cars and will be buying homes, raising families, and trying to figure out how to pay for college and save for retirement over the next decades. If credit unions cannot achieve relevancy with this generation, then the industry has lost its relevancy.
The bottom line is that credit unions need to take these bank and nonbank competitors seriously. Doing so requires understanding the value each competitor offers and deciding how to counter the offering. It takes designing and deploying rich member experiences across channels and making consumers, especially younger ones, aware that they can manage their financial lives efficiently and cost-effectively at a credit union.
Bill Handel is vice president of research at Raddon Financial Group. He can be reached at 800-827-3500 or [email protected].
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