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The CFPB Rulings on Checking Account Access: Burden or Opportunity?

Banks and credit unions have no obligation to go out of business by taking on unnecessary risk with their deposit account opening policies. Rulings by the Consumer Financial Protection Bureau (CFPB) will definitely change the way most financial institutions use negative data (e.g., previous accounts closed-for-cause) to outright deny the consumer’s request to open a checking account. If consumers with a history of account abuse are approved and provided a checking account with privileges such as overdraft protection, the implication to the institution will be a loss in profits.

We have done a lot of hands-on, retrospective analysis that clearly demonstrates the predictive value of ‘previous closure’ data, and there are customer risk segments where the odds are stacked against the institution. This unprofitable outcome only occurs if the following is true:

1.Consumers who have difficulties in the past are placed into a deposit product where account mismanagement can create losses, and/or;

2.These ‘risky’ customers are managed exactly like a lower risk customers that are traditionally brought on board.

New Deposit Product

At the Forum on Access to Checking Accounts, CFPB Director Richard Cordray fancied himself a product innovator by offering the following suggestion:

“One interesting area of innovation involves technology that may lead to improved, low-cost transaction accounts, which do not include any overdraft or other credit feature, and which are accessed either through traditional branch networks, or through alternative channels.”

Obviously, configuring a new financial services product is not as easy as it sounds; however, these ‘second chance’ or ‘basic transaction’ products are acceptable to the CFPB and protect the bank from account abuse losses. This new product in-and-of-itself will not lead you down the road to meaningful profit if these customers utilize only this account. It is necessary but not sufficient.

A Different Customer Treatment Approach

You will now open accounts that you normally would not let through the door. But you can also mitigate your risk by giving these consumers a bare bones account where the institution is not exposed. Indeed, there is a lot of promise in that customer segment—so if you can create a ‘path to graduation’ for those who behave well, you can develop positive customer relationships, grow your assets, and likely retain them.

While cross-selling additional product is important, it is critical that you first create a treatment strategy to engage customers with the basic Demand Deposit Account (DDA)—most consumers identify their ‘primary’ financial institutions as the place where they have their main checking account. With an emphasis on cross-selling, many times early lifecycle management efforts, like ‘activation’ and ‘usage’ streams, are given short shrift.

Once you have the customer engaged with the DDA, you then need to determine which customers should ‘graduate’ to an account with additional privileges such as overdraft protection. From a risk perspective, you should look for internal account behavior and attributes that indicate the customer can handle the overdraft feature—the average account balance, the minimum balance, the frequency and amounts of withdrawals, the frequency and amounts of deposits, etc. Because you may not have a lot of experience with this customer segment, you should use a ‘test-learn-modify’ approach to hone in on the best targets and the best offers.

The Intended Outcome

Not everyone will or should graduate to the enhanced DDA products. The CFPB also wants financial institutions to work with their customers to ensure they do not overspend, so the overdraft feature should not be offered to customers that can’t handle it. Additionally, the offer of the overdraft feature needs to be accompanied with an educational component and simple terms and conditions.

The end game of this approach is not tricking customers into paying overdraft fees. The whole point is to develop a trusted relationship with this underserved segment and match them with the best products so they do not leave you for a competitor—there is a large percentage of customers who will not stand for the bare bones product when they have better options elsewhere.

When you give these risky, underserved customers a chance and prudently offer them enhanced services, you will have a segment of customers that is very loyal. Because they will view you as their ‘primary’ financial institution (and the one that gave them a chance), you are positioned to provide additional services to those who graduate–longer tenure, incremental lifetime value, and strong referrals. The CFPB has forced change that is scary and requires significant effort, but if viewed as an opportunity the result could be a new group of customers who are highly engaged, fiercely loyal, and most importantly, highly profitable.

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