By Ray Birch
SCOTTSDALE, Ariz.—One analyst insists it’s time credit unions drop free checking—not only to compete with fintechs but to also, surprisingly, give consumers what they want.
Ron Shevlin, director of research at Cornerstone Advisors, said the long-held assumption within credit unions that free checking is a loss-leader that drives deeper member relationships and attracts greater deposits is actually a myth that is not supported by the research or data.
“From the research I conducted, the lesson for credit unions is they need to reinvent the checking account, drop free checking, and bundle the account with servic
es consumers want and are willing to pay for,” said Shevlin.
Among many questions presented in his research, Shevlin asked Millennials if they would be interested in a checking account from Amazon, which the company has stated is coming. The responses, revealed some very interesting attitudes from younger consumers toward checking, according to Shevlin.
Shevlin said that 43% of Millennials said they would be interested in an Amazon account.
“I told consumers that Amazon is going to offer a checking account that will be bundled with services like cell phone damage protection and travel insurance and will cost $5 to $10 a month,” he said. “I gave them four options to choose from: I asked them if they would close their existing account and take the Amazon account, take the Amazon account and keep their existing checking account, think about taking the Amazon account, or take a pass on it.”
The Key Question
Shevlin reported 43% of the Millennial respondents collectively chose options one or two.
“And the older Millennials showed greater interest in the Amazon account than the younger ones,” he said. “But there is the key question I asked that indicates what type of checking account consumers want going forward.”
That question: Shevlin asked if Amazon offered a free account without the bundled services, which would they want, the bundled package for a fee, or free account?
“Across every generational segment, fewer consumers are interested in a free account, as opposed to a bundled account for a small monthly price,” he said.
The finding, said Shevlin, is very telling about the future of checking, especially with younger consumers. He said that the threat to CUs is not as much the fintechs and Amazon as it is a new checking model that offers convenient, desired services for a low price.
“People are not saying I want to bank with Amazon,” said Shevlin, they are saying they like the value proposition of the bundled checking account, and to get it, if I have to take your little checking account, OK.”
An Advantage Over Amazon
In fact, Shevlin said the study shows that banks and especially credit unions have an advantage over the fintechs and Amazon in the battle for checking, as consumers like having access to an established, trusted financial institution that has physical offices they can walk into if they encounter a problem with their checking account or another service.
“Consumers are not saying they like branches, but they are saying they like the safety blanket branches provide, the personal, face-to-face service, which the fintechs don’t have,” Shevlin said.
He emphasized that the ease of use of the new digital checking accounts fintechs are offering must be matched by credit unions.
The Number-One Lesson
Ron Shevlin
“But the number-one lesson here is that free checking should no longer be offered and credit unions need to redesign their checking offerings to go with bundled services people will pay a small price for,” said Shevlin.
There are other reasons, too, for dumping free checking, Shevlin posits. He said his research indicates the thinking that free checking is a loss-leader that drives deeper relationships and attracts greater deposits is flawed.
“I have data that show consumers who have a free checking account, in particular Millennials, are less likely to choose another non-deposit product—like a first mortgage, home equity line or credit card—than those who pay for a bundled services offering,” Shevlin said. “So the idea that you will attract someone and grow the relationship with free checking, anymore, is not proven out by the data.”
Another Trend to Watch
Another trend is occurring that’s lowering deposit totals in checking accounts and reducing the bottom line impact of free accounts, making the long-time bedrock checking account no longer a source of solid, dependable cheap core deposits, he said.
“It’s deposit displacement,” said Shevlin, an issue Shevlin shared in a previous CUToday.info report here.
Shevlin pointed to digital wallets—including Starbucks’ highly successful offering—prepaid cards, PayPal and Venmo accounts, and health savings accounts, all of which are diverting away balances, sometimes even before they make it to the direct deposit.
“The challenge that credit unions will face more and more over the next five years is they will increase their membership by putting out the free checking account, which will become nothing more than a pass-through for direct deposit,” Shevlin said. “And what happens in a world in which Amazon offers a place for direct deposit? I have to believe a ton of Amazon Prime customers will say, ‘Fine. I will put my direct deposit into Amazon and use them like a bank.
A Need for ‘Reinvention’
“Credit unions need to reinvent the checking account to compete not only with Amazon and fintechs, but also the mega banks that dominate the Millennial market share,” continued Shevlin. “And CUs, too, need to meet the needs of younger consumers.”
But a big obstacle is in the way of change, insisted Shevlin.
“Free checking is just not profitable and today you have to make money on the checking account because free checking just does not drive deeper relationships,” said Shevlin. “Technology is not the barrier here for credit unions, that is not the issue—making the account more digital. The big challenge in the way are credit union boards. They feel that charging members for checking is an insult.”