By Laura Trujillo
A goal of many banks is to try to draw in more customers from ranks of the unbanked or underbanked.
Fifth Third Bank, Cincinnati, recently introduced a new service, called “Express Banking,” that has been in the planning stages for several years. It is designed to attract people who had previously been unbanked or underbanked. Fifth Third is a regional bank with assets of $135 billion.
Below is a description of how the bank went about researching and developing Express Banking, with a focus on the role of legal and compliance.
One in four households in the United States is either unbanked or underbanked, according to a 2013 Federal Deposit Insurance Corp. (FDIC) study. The reasons are varied, including people not believing they have enough money for bank accounts, past banking problems preventing them from opening accounts, and the feeling that banking fees are too high.
The underbanked are growing at a faster rate than the overall population, according to the study. As the underbanked population grows, so does the number of banks and financial institutions offering new services or exploring the idea of getting into that market.
The FDIC has conducted biennial surveys of the financial habits of the underserved Americans and how banks try to reach them. The reports show that the needs are vast—because the underbanked spend a larger percentage of income on financial services than those making more money—both through expensive short-term credit as well as interest rates on credit cards.
The underbanked have bank accounts, but continue to rely on alternative financial services, like check cashing services, payday loans, rent-to-own agreements or pawn shops.
Fifth Third’s 12-state footprint is home to some of the highest underbanked markets in the country, including Kentucky, Florida, North Carolina and Kentucky, according to a report by the Corporation for Enterprise Development.
Underbanked households with average incomes of $25,500 per year spend $2,412 each year just on interest and fees for alternative financial services, according to a 2011 KMPG study.
Understanding the market
Several years ago, before the FDIC released its first report on the unbanked and underbanked consumer, Fifth Third recognized that some of the bank’s existing customers did their banking with bank, but did their alternative transactions with someone else. The bank wanted to bring that business within its four walls to make it more convenient for customers and to capture additional business through new product lines.
Fifth Third initially started adding services such as gift cards, remittance services, and foreign currency exchange as one-off product launches, but soon realized there was value in bundling these services together. At the same time, Fifth Third saw that there was not only an opportunity to capture additional business from existing customers, but that providing these services could attract new customers.
To build organizational support for expanding services to underserved consumers, Fifth Third initially relied on standard available research, particularly the “FDIC National Survey of Unbanked and Underbanked Households,” to understand the types of consumers who use alternative financial services and why they use them.
The bank then held consumer focus groups to gain better insights to understand objections and barriers to switching to a bank for these services. There was a strong feeling that banks provide higher service levels than nonbank providers, so getting these services from a bank was regarded as a plus.
In order to package the bank’s existing services together and to provide a way to track new customer relationships, Fifth Third decided to develop (what eventually became) Express Banking service, which has a core account that allows customers to perform all of their “cash” transactions in one place and keep track of all of their transactions as they use the services.
In many respects the development of Express Banking was no different from other new product development efforts in which the bank realized that there was a known need that the bank could fill with a new product set.
Once it developed the initial concept, the bank went through additional consumer research to make sure it had not only the right set of features and benefits, but also had a clear way to communicate the unique value proposition to potential users of the service.
The bank uses Certergy as its partner for branch check cashing and for providing immediate funds availability on mobile deposits. There is a small fee for the service (1 percent to 4 percent) related to the face value of the item depending on the type of check presented and the frequency of use by the customer and Certergy provides a back-end risk assessment and guarantee to ensure that the check being cashed or made immediately available is good.
Mitigating risk, checking customers
Fifth Third runs all new potential customers through initial Know Your Customer processes which include OFAC checks, ID verification and the like.
The bank also performs an initial risk screening using a third-party vendor to determine if the customer had prior deposit account charge-offs at another institution or had been reported as performing first-party fraud using their account.
The bank accepts all customers through this process except those who are reported as known fraud. In cases where the customer had prior charge-offs, the bank allows the customer to enroll in Express Banking or in the bank’s Basic Checking account, which is a traditional “safe” account with restrictions on overdrafts and certain deposit transactions to lower the risk to the bank.
Once a customer is in Express Banking, the bank has low risk because the account operates on a good funds model that requires that all deposits are either electronic (ACH or transferred from another deposit account at the bank), cash, or checks that are verified as good funds and deposited as cash.
There is no float allowed on deposits. This protects the customer from spending funds on which they don’t have full availability, and it protects the bank from returned item risk.
All payments from the account are good funds (or “real time”) as well, so there is no check writing allowed. Payments can be made using a debit card, by purchasing money orders and cashier’s checks or by withdrawing cash at an ATM or a branch.
The bank spent a significant amount of time developing training for the rollout of Express Banking. Although it has many aspects which are similar to traditional depository services, it has enough differences that the bank needed to make sure that front-line staff understood that Express Banking is an entirely new way of providing transaction services to customers.
From the early stages of product development Fifth Third had a close partnership with its delivery team to define specific product attributes as well as develop training modules, new procedures, reference guides and marketing materials.
Fifth Third held a series of in-person meetings and calls with all levels of the organization from senior management down to front-line consumer service representative to not only explain Express Banking to them, but to also hear what questions they had prior to rollout.
Involving legal, compliance, risk and operations
The bank’s best practice is to involve partners in legal, compliance, risk and operations early in the product development process. These partners need to understand the strategy and flag risks early in the development process so that Fifth Third can address them systematically as part of the product design and not as something to mitigate after the fact.
The bank found that its risk partners were enthusiastic about Express Banking because it reduced risk to the organization and to the customer by taking transactions previously performed as one-off events to now running them through an account with more visibility and controls. Risk partners also saw value in a strategy that expanded the bank’s reach to potential customers outside of traditional products.
Assessing risk and due diligence
Fifth Third has a standard protocol for analyzing all eight risk types (strategic, market, liquidity, credit, compliance, operational, legal and reputational) prior to initiating any new program or project.
Express Banking went through Fifth Third’s standard risk assessment process. The initial approval to develop the service was obtained during the bank’s annual strategic planning process and was reviewed at the highest levels in the organization, all of the way up to the CEO.
On an ongoing basis, the bank has monthly senior management reviews that include the C-level executives from consumer banking, marketing, risk management, IT and compliance to review all aspects of Express Banking.
Meetings with regulators
In the fall of 2014, the bank participated in the Consumer Financial Protection Bureau’s “Access to Checking Forum” in Washington, DC. Fifth Third had already started the bank’s initial work on Express Banking, but the forum was an opportunity to hear different perspectives from regulators, advocacy groups and consumer reporting agencies on how to responsibly improve access to checking accounts for those who had prior issues with account management.
In early 2015, Fifth Third had an additional meeting with the bureau to discuss the bank’s approach on Express Banking in more detail, particularly the importance of having a good funds model account that doesn’t allow customers to overdraft and eliminates their risk of having a returned deposited item.
Community and consumer advocacy groups
Fifth Third is a member organization of the Center for Financial Services Innovation (CFSI), and the bank actively participates in their semi-annual roundtable meetings on financial inclusion and presented at their annual conference.
The bank is also reaching out to community groups through its Community Reinvestment Act officers to talk about how Express Banking can meet the needs of underserved consumers in our communities.
Just before the bank launched Express Banking, the “Bank on National Standards” were released. In a side-by-side comparison, Fifth Third met or exceeded virtually every aspect of the standards.
The bank is now several weeks into the launch of Express Banking and customer use of the service is exceeding expectations. Fifth Third’s research paid off with a significant number of new relationships coming from consumers who used to only use Fifth Third for check cashing or money order purchases in the past.
Fifth Third believes that Express Banking can provide security and give consumers a more affordable option than is widely available today from providers outside the traditional banking system.