By Ray Birch
SCOTTSDALE, Ariz.—The checking account is no longer what it once was, asserts one analyst. who says they’re quickly morphing into “paycheck motels.”
Ron Shevlin, director of research at Cornerstone Advisors and who recently completed research on checking products, told CUToday.info the traditional nature of the stawart checking account is changing and credit unions must make adjustments in response. He cautioned credit unions it’s time to stop clinging to the belief checking is the primary driver of deeper relationships, and that free checking is really valued by consumers.
“Reality is nearly everybody now has a checking account, as the unbanked rate fell to just over 6% the last the FDIC looked into checking accounts,” said Shevlin. “They are pervasive and ubiquitous, but the role and importance of the checking account has dramatically changed from what it was 20 years ago.”
Shevlin said there are clear generational differences in how consumers perceive the checking account, observing Baby Boomers fully expected that right out of college–if not sooner–they had to have a checking account in order to manage their finances and pay their bills as adults. But Millennials and Gen Z don’t see the world of finance the same way.
“My oldest daughter is 29 and when she graduated from college seven years ago she had a checking account, but one of her first questions was, ‘Why do I need a checking account?’” said Shevlin. “She thinks she can manage her finances with a prepaid debit card or a credit card.”
‘A Paycheck Motel’
That evolution in the consumption of financial services spawned by all of the new digital services channels has led to the checking accounts becoming a way station.
“For many, they have become a paycheck motel,” said Shevlin. “A place for money to sit before it moves on somewhere else. It just provides the convenience for doing direct deposit. In the past four to five years a lot more types of alternative accounts have emerged in which money is moving from the checking account.”
As an example, Shevlin pointed to the health savings accounts in which nearly 25 million Americans have stuffed more than $44 billion.
“That’s $44 billion that used to go into checking accounts, but now gets diverted—typically in the payroll processing process—before the money even gets to the checking account,” said Shevlin.
Person-to-person payments apps are also diverting funds from checking. In 2018, for example, Venmo processed $62 billion in P2P payments, with Square Cash doing about $30 billion.
Then there is the emergence of merchant apps. Shevlin said one-in-four consumers have the Starbucks mobile app on their mobile devices, and a quarter of those people frequently load funds onto the app. “That adds up to a lot of money—at least $2 billion. Other merchants have gotten the hint. A third of all consumers have the Walmart app on their smartphones and a quarter of them load funds frequently.”
If all that weren’t enough to siphon funds that would otherwise reside in checking account, then there are the robo-advisor tools, observed Shevlin, pointing to estimates by consulting firm AT Kearney, which projects by 2020 consumers will have more than $2 trillion sitting in robo-advisor accounts.
The Ongoing Disconnect
Shevlin said he is not certain most credit unions really understand how the long-time foundational checking account is changing.
“I’m hesitant to ever make a blanket statement about whether credit unions get this or they don't, but my feeling is their marketing practices don't reflect how the account is changing,” said Shevlin. “The thinking that the checking account is the first step towards building a broader relationship with a consumer does not reflect today's reality. Yes, in the past, the checking account was the primary transaction account with the consumer. It was the place they transacted most often. Not today. I don't think the marketing practices for lot of credit unions reflect the fact that having a checking account relationship is becoming more and more meaningless to the consumer.”
Shevlin believes the disconnect between the new reality of the marketplace and entrenched traditions can been seen in how credit unions continue to put significant marketing dollars behind free checking, frequently comparing their offerings to banks’ fee-based accounts. Yet consumer research shows consumers really don’t care that much about having a checking account that charges fees, because the bank typically gives them ways to avoid the charges, he observed.
What Survey Discovered
“I surveyed 2,500 consumers (who were) Millennials Gen Xers and Baby Boomers,” said Shevlin. “I asked them if they had a free checking account or fee-based account. I asked them if they had a fee-based account if they are able to have those fees waived by doing certain things. And most said yes. In fact, most of them said, despite having a fee-based account, they felt they paid no fees for checking. Here's the reality: only 7% of consumers (in the study) say they actually pay a monthly fee for checking.”
Looking more closely at that research as broken out by age group, Shevlin said he found one-third of Millennials said they had a fee-based account, but only 7% said they pay any monthly fees. Thirty percent of Gen X’ers said they have a fee-based account, and only 6% reported they pay a fee. With Boomers, one-in-five have a checking account that is fee based, but only 3% pay a fee.
“So, credit unions saying, ‘Hey, we have free checking,’ (but) it’s really not a big deal anymore,” said Shevlin.
What Lies Ahead?
Where is the market headed?
“If I were a credit union I’d be rethinking the goal and role of the checking account,” said Shevlin. “I would reconsider whether it is the primary transaction account for your members. And think about what you are really providing them. I might look more toward moving away from free and bundling additional services in a low-cost package. Bundle in things like identity theft protection, cell phone protection, services that consumers value and can get from you at a lower cost. The good old checking account, even the free checking account, does not have a lot of value in the minds of consumers anymore.”