The Move Your Money project, which encouraged Americans to close accounts at large banks and open accounts at smaller institutions, was designed to send a message to the nation's biggest financial institutions. But the movement away from large money-center banks and toward more cuddly community and alternate money storage and payments services is being spurred as much by practical as ideological reasons.
As Steve Streit, CEO of Green Dot, tells me in the accompanying video, large banks simply aren't set up to deal profitably with a large chunk of the American consumer base — without nailing them with huge fees. Banks face a challenge of servicing customers that don't take loans and don't generate fees through other services, especially at a time of generally muted interest rates. On deposit consumers that just want to deposit $500 a month, "not only are banks not making money on them, they're losing money," Streit said.
As a result, banks feel compelled to level the kind of fees that alienate many consumers. "If you don't make a sufficient amount of money and don't have a good enough cash flow to maintain minimum balance, you might get hit with minimum balance fees or monthly fees," said Streit. "If you make $8 or $9 an hour, and you get with $70 in fees per month, that's painful."
Green Dot, which charges fixed monthly fees for debit cards — which can be used to accept paychecks, pay bills, and access AMTs -- is one of the places to which people have been moving their money. It has about 4.2 million active accounts. A Federal Deposit Insurance Corporation survey taken in 2009 showed 7.7 percent of U.S. households, or 9 million, don't have bank accounts, and that 17.9 percent, or 21 million, are "underbanked," meaning they rely on alternative financial services like non-bank check cashing, payday loans, and pawnshops. But Green Dot believes the target market is much larger. Reports have suggested "there are anywhere from 70 to 160 million people who are ripe for a basic transactional account product," Streit said. Half of all Americans make $50,000 or less.
About half of Green Dot's customers don't currently have bank accounts. Streit believes the market isn't just segmenting between large banks and small banks, but between full-service and no-frills banking. Many consumers, particularly younger people who have been reared on electronic commerce and have comparatively simple financial lives, question the need for a checking account. "They need a safe place to put wages and a convenient way to pay bills," said Streit. "They're not looking for all the other amenities." He compares Green Dot and other simpler versions of banking to Southwest Airlines.
Streit believes the pace of people moving their money from banks is likely to intensify — in part because large banks will drive some customers away with high fees, and in part because other providers will pull them away. More significantly, he believes the Move Your Money sentiment has opened up a conversation among consumers about bank fees. Said Streit: "Any time you have that discussion, it benefits the disruptive newcomer."
Daniel Gross is economics editor at Yahoo! Finance
Email him at email@example.com; follow him on Twitter @grossdm