Age and income are the best predictors of a household's use of financial services, but fiscal status determines whether consumers are fee driven or credit driven, according Raddon, a Fiserv Company.
The Lombard, Ill.-based research firm studied six consumer segments, based on age and income. Four of these are above the median household income, and they traditionally get a lot of focus. "The banking industry in general – spend very little time focusing on the two lower-income segments, which we name the Fee Driven and Low-Income Depositor segments," Andrew Vahrenkamp, Raddon senior research analyst, said. Fee Driven are age 18-44, earning less than $50,000 in income, while Low Income Depositors are 45+, also earning less than $50,000.
Raddon calls the first group "Fee Driven" because the primary way they provide profitability to an institution is through fees, as opposed to their higher-income counterparts, the "Credit Driven" who provide profitability through borrowing. "Lately, though, the fees have dried up. Overdraft income is down, interchange income has plateaued. Since these consumers generally have low loan and deposit balances, they provide little revenue opportunity on the margins."
Raddon asked, "If banks and credit unions can't get income from these 'Fee Driven' consumers, why bother serving them at all?"
For some institutions, that path is exactly the one they are taking. Free checking has dwindled, as requirements for direct deposit or transaction activity have become more commonplace. The closure of some branches formerly serving lower-income areas and the tightened credit putting more emphasis on income has priced out these consumers.
However, the research showed there is a lot more here than meets the eye. "While generations never change (Once a millennial, always a millennial), demographic segments change over time," Vahrenkamp noted.
The bulk of the fee driven segment falls into the millennial generation. As these consumers are starting their careers and adult lives, their potential income will outpace their current static snapshot. "People marry, progress in their careers, form households, and generally advance upwardly, even in 2010s America," Raddon suggested.
Studying the data of two large community-based financial institutions, Raddon revealed how fee driven households transitioned into other segments over time. Only about a third of consumers who were fee driven in 2006 are still fee driven today, and only slightly more than half (54%) are still in a mass market segment.
What this means is that investing in the Fee Driven segment might make sense for a financial institution looking to build loyalty, primary status, and balances over time. While many institutions seek out millennials, their focus is often on those s who are higher income (the credit driven), as opposed to the lower-income millennials in the mass market. "Our research indicates that upward mobility makes fee driven millennials a worthy target as well," Vahrenkamp said.
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Roy Urrico
Roy W. Urrico specializes in articles about financial technology and services for Credit Union Times, as well as ghostwriting, copywriting, and case studies. Also: writer/editor of a semi-annual newsletter for Association for Financial Technology since 1997 and history projects funded by the U.S Interior Department, National Park Service and Warren County (N.Y.).
