Riding The Waves Of The P2P Lending Market

Congrats to all involved with the Lending Club IPO. This is what it’s all about: Building something from scratch, enduring the ups and downs, then going public and making a boatload of money.

I’m no Wall Street analyst, so I couldn’t tell you if the ~$8.5 billion valuation that Lending Club (LC) hit at the end of its first day of trading is a fair assessment of its current or future value. But what I can tell you is that there are people who are deceiving themselves about what Lending Club is, and what its future prospects are. The delusions are reflected in articles like CNBC’s How LendingClub Aims To End Banking As We Know It, which states:

“LendingClub is setting out to transform the banking world. To get there, it’s following a playbook popularized by some of the world’s biggest tech companies. Any true comparison between LendingClub and the world’s most valuable tech companies is premature, of course.”

I guess any “true” comparisons between LendingClub and the world’s most valuable lending and investment providers aren’t comparisons worth making, eh?

My take: The conditions which made Lending Club possible and got it this far are temporal and likely to change in the next few years–to LC’s detriment.


First of all, can’t somebody out there come up with a better term for what Lending Club is than calling it a “peer-to-peer” lender? The institutional investors providing funds on the marketplace are anything but “peers” to the people looking to borrow money on the site.


There are two conditions that have enabled Lending Club to exist and prosper (get it?). The first is a pool of investors that would like to get a better return on their available capital than what they can get from other (i.e., existing) investment alternatives.

The second is a pool of borrowers who need funds and are willing to pay a higher rate than they would have to pay elsewhere, or, more likely, that need funds and are unable to get those funds from other (i.e., existing) sources.

The size of these two pools–and their willingness to use Lending Club to meet their needs–have been sufficiently large, and growing over the past few years to fuel Lending Club’s growth and drive the IPO.


The questions to answer are: 1) Why did these pools grow over the past few years? 2) Will they continue to grow in the future?

The investor pool grew largely because of two reasons: 1) incredibly low interest rates, making it hard to find acceptable returns, and 2) even in the face of an increasing DJIA, professional money managers are always looking for superior returns to outshine the competition.

Why did the borrower pool grow? Because the economy sucked, and, to some extent, because some  (many?) individuals are mismanaging their financial lives–many are, or have been, unable to pay off existing loans and credit card balances. In fact, 83%of Lending Club borrowers report using their LC loans to refinance existing loans or pay off their credit cards.

Reported Loan Purpose

20141215 LendingClubSource: Lending Club


So what happens going forward? It mostly depends on the state of the economy, the direction that interest rates go in, and the P2P lending market itself.

If we experience a period of economic prosperity, and people are more able to pay off their loans and credit cards, Lending Club may very well see a steep drop in loan volume. Roughly 62% of Lending Club’s 2014 loan volume came from borrowers with a Grade C or lower rating. What happens when the economy improves and the Gen Y population–who start off adult life with lower credit scores and grades–mature and move into higher creditworthiness classes? Is there another pool of risky borrowers to fill the void? And if interest rates rise, could the rates that borrowers must pay on the LC platform might be even too high for them to stomach? Grades E, F, and G are already paying interest rates in excess of 20%. We’re getting close to payday lending territory, no?

Will the investor pool grow? This is comprised of two components: 1) the number of investors, and 2) the amount of funds those investors put into the marketplace. I can’t talk to #2, but it seems likely there are limitations to the number of investors who can or will participate in LC. As the marketplace has grown, competition to fund the best borrowing opportunities has grown, and has even spawned new companies who help investors identify their best opportunities. As a result–much like the stock market itself–professional investors have an edge over individual, amateur investors. As a result, the number of individuals investing in LC will likely remain capped.

And with a first day valuation of $8.5 billion, I’m guessing that venture capitalists across Silicon Valley are firing up their bongs and thinking “Dude! I gotta invest in one of these pee-pee lending marketplaces!” And that means more competition for Lending Club. Increased competition will likely result in some erosion of LC’s overall share.


Claims that Lending Club is “disruptive” or that it will “end banking as we know it” are so totally ridiculous that it has to make you wonder what the claimants were smoking when they made these claims. Lending Club is a niche player in the lending market, a fringe player.

According to the Federal Reserve, consumer loans issued by the 100 largest banks (ranked by assets) grew 6.5% between Q1 2012 and Q3 2014 to nearly $1.18 trillion. From the 2015 Financial Brand Marketing Survey, 43% of respondents indicated that their FI’s loan volume increased by more than 10% in 2014 over 2013 levels.

Disruption? Ending banking as we know it? Hardly. More like creating a niche somewhere between credit card borrowing and payday lending.


Bottom line: I can’t tell if you $8.5 billion is a fair valuation for Lending Club. What I can tell you is that, if and when the economy improves, it’s going to face some stiff challenges.

That said, I would love to have a ride on the boat.


Dissecting The So-Called Rise In Bank Branch Popularity

The American Bankers Association released the findings of its 2014 survey of 1,000 US consumers regarding bank channel preferences. A pymnts.com article titled Mobile’s Impact on Bank Branches reported that:

“21% of those polled selected the branch as their most preferred banking method, up from 18% in 2013. The Internet was favored by 31%, but that’s down sharply from the 39% who preferred it last year. ATM’s are also up in popularity, rising to 14% from 11% in 2013. Mobile banking is up to 10% from 8% a year ago. “

The article quotes an ABA SVP who said, when asked why branches are getting more popular:

“When people are conducting a complex transaction…they often prefer to do it in person. We’re seeing a branch renaissance in a some areas, with many banks transforming their branches to become more efficient and customer-friendly.”

My take: The title of the article is wacky, and the ABA explanation is incorrect. Something else is going on here.


The pymnts.com title is very puzzling. How did they conclude that a 2% rise in mobile channel popularity was the cause of a 3% bump in branch preference? That doesn’t make any sense.

The ABA SVP’s comment doesn’t hold water, either. It’s not all-of-a-sudden that people are making complex transactions (the SVP cites opening an account or applying for a home or business loan as examples), and now prefer to do them in branches.

The percentage of consumers who open a new checking account or apply for a home loan is still a minority of all consumers, so the minority shouldn’t be moving the needle that much. And even if those consumers did prefer a branch to apply for those products, when asked “what is your most preferred banking method?,” they should be thinking about their broader set of banking transactions when answering the survey question.

Side note to ABA: I might be wrong, but I find it hard to believe that consumers who applied for a business loan are impacting consumers’ channel preferences.


The second part of the ABA quote–“we’re seeing a branch renaissance in some areas”–might be more of an hallucination than a legit sighting. “Many banks are transforming their branches…” Really? There are certainly examples of banks creating “branch of the future” prototypes, but it seems to me that the trend isn’t so much “transformation” as it is “downsizing.”

The focus on making the branch more efficient is in response to declining volume, not a resurgence in popularity.


The real story in the ABA survey isn’t about branches or the mobile channel. It’s about the Internet.

In 15 years of being an analyst dedicated to the financial services industry, here’s what I’ve learned: Change comes slowly. Percentage shifts in consumer adoption or preferences are typically very small year over year.

Yet, the ABA survey found that the percentage of consumers who listed the Internet as their preferred banking method dropped eight percentage points from 2013 to 2014. That’s a colossal shift.

What happened between 2013 and 2014 to cause this huge drop?

You will never convince me it was a shift to branches as the preferred method, because I simply don’t see a widespread improvement in branch capabilities, and usage numbers don’t support this theory.

I would buy the theory that people were shifting their preference from the Internet to mobile, but mobile’s popularity improved by just two percentage points, and the ATM saw a bigger percentage point jump than that (really? the ATM is your preferred banking method? weirdo).


Lacking access to the raw data, I’m at a loss to explain this drop in Internet popularity. With the data, I’d  look at year-over-year changes by generation, geography, and maybe even income. I’d also look at the underlying demographics of the survey sample in both years, but I’ll give Ipsos (the firm that conducted the surveys) the benefit of the doubt that they did a good job here.

While I can’t explain the drop in preferences toward the Internet, I will stick to my guns that this is not about a resurgence in branch popularity–and that, if anything, the impact of mobile on branches is bad news for branches, not good news.

Resigning My Spot At The FinTech Titan Table

 With all apologies to the Beverly Hillbillies….

“Come listen to my story about a man named Ron,

A real tech moron, could barely turn his PC on,

And then one day he gets a message from his bank,

And now he has to give up his FinTech Titan rank.”


It was an honor to be named a FinTech Titan by Meniga CMO Duena Blomstrom. To be included on a list with the likes of Brett King and Chris Skinner is pretty damn good.

But I’m afraid that some events have transpired that compel me to resign my spot at the FinTech Titan table.


Woke up Saturday morning, went down to get my coffee mug off my desk, saw my smartphone sitting there unplugged, and turned it down to check the power level.

What I saw was an alert from my bank notifying me of some suspicious activity from an unrecognized IP address trying to access my account, and a link to reset my password. Clicked on the link, entered my ID and password and hit enter. The next screen asked me to verify my address and social security number.


At this point, you’re sitting there thinking “What the hell were you thinking?@!#”

And that’s exactly the problem–I wasn’t thinking (I was first going to get my coffee cup). When I saw the prompt for the SSN it finally dawned on me that this was a phishing attempt.

The fact that I’ve never given my bank my cellphone number never seemed to make its way into my consciousness.


Picked up my iPad, which is the device I typically use to access my bank accounts (because, really? can anyone my age really read anything on a smartphone?).

Logged into the mobile app from my bank, saw the money was still there, and started hunting around the app to figure out how to change my password.

For the life of me, could not figure out how to do that.


Put the iPad down, got out my debit card and handed it to my wife and asked her to read me the phone number on the back of the card (G*d help me if I ever need to call my bank when no one else is around, because the font size of the information on the back of the card is way too small for my old eyes to read).

Dialed the number….”Para espanol..”

Oh for chrissakes….<Ron presses ZERO about 100 times>

“Please enter your account or card number”

Did it.

“Your account balance is…”

<Ron presses ZERO 100 more times>

“In order to get you to the right person….”

Then my wife suggests: “It would be quicker to go the branch.”

Good idea. Grabbed the car keys, drove the two minutes to the branch. Only to find out it was still closed and wouldn’t open for another 30 minutes.

Called my wife, told her the branch wasn’t open, asked her to make the call. Headed home.

Got home, got handed the phone by my wife, who told me she had talked to someone, asked them to place a hold on the account, and was told she would have to transfer my wife to someone in wealth management.

Wealth management? For g*d’s sake, those people don’t work more than 10 minutes on Monday thru Friday, g*d knows they won’t be there on Saturday.

And they weren’t. Call never went through. Hung up. Dialed again. Started going through the process all over again.

Wife said: “Branch opens in 15 minutes. Maybe someone will be there early and let you in.”

Good idea. Grabbed the car keys, drove the two minutes to the branch. And they did let me in early. Well, if you consider 8:59 to be “early.”


So now I’m in the branch. Explained to the woman who let me in what I needed, she said, “go right in here, Tom can help.”

Explained to Tom what happened, handed him my statement, debit card, and drivers license, and he gets into my account. “Nothing has happened to the account.”


“Let’s get your online account closed,” he said.

At which point he picks up the phone and calls the online banking support number

“Are you calling into the same number that customers call into?, I ask.


I’m thinking: “You’ve got to be freaking kidding me. An employee can’t call in and avoid the wait?”

So we’re sitting there waiting for the contact center to pick up.

“Your call is very important to us. A representative will be with you shortly.”

I’m freaking sitting across from a representative you automated idiot!

As we’re sitting there, Tom says “you’d be surprised how many people this happens to.”

And I say: “I’m a freaking FinTech Titan, Tom! I know g*ddamn well how many people this happens to!”

Except I didn’t exactly say that out loud.

And then I had to deal with that thing known as TRUTH: “This happens to millions of morons all the time, and sadly–I am one of the morons.”


A call center rep finally comes on, asks how he can help. Tom tells him who he his, and gives the rep his employee ID and access code (which I now know).

Online access is shut down, a new ID and temporary password is established, and I’m good to go.

Until Tom says, “I know you didn’t come in to talk about this, but I can see from your accounts that you qualify for the Super-de-duper Plutonium Level of our new rewards program.” And pushes a brochure across the table.

Looking at the rewards (if you want to call them that) that I qualify for, most won’t do me any good since I won’t be getting a mortgage or HELOC any time soon. But the extra bonus on the cash rewards credit card is really good.

I asked Tom if he gets anything if I sign up, and he says he won’t get a commission or anything, but will get “brownie points” if I enrolled in the program and even more brownie points if I apply for the credit card.

“Go ahead and enroll me in the rewards program, Tom. But I gotta talk to the Mrs. first to see if we want the card.”

And went home.


Got home. Told my wife we were all set. And then showed her the brochure for the rewards program.

“Damn, this is really good isn’t it? Given what we spend on gas and groceries, this would more than double the cash we get back on our current card. Let’s get it.”

So what do you think I did next?

RIGHT. Grabbed the car keys, drove the two minutes to the branch. Sat down with Tom, and applied for the credit card.


So there you have it. Within the course of an hour, I:

  1. Fell victim to a phishing attempt;
  2. Visited a branch three times (or two, depending on how you want to count it); and
  3. Applied for a credit card in a bank branch.

At this point, I’m afraid that the only honorable thing to do is resign my spot at the FinTech Titan table. I’m not worthy. Not sure I ever was.

And the next time some smart ass market researcher asks me “What channel did you use the last time you applied for a credit card?” I’m gonna have to embarrass myself and say “The branch.” Like all the other morons who had to go there to fix their phishing mistakes. 


Mobile Bill Pay Realities

Welcome to Delusions and Reality Week here at Snarketing 2.0. On Monday, it was Disruptive Delusions Day, today we discuss the realities of mobile bill pay (in the US).

SAP released the results of a global survey it conducted which found that:

“Half of the respondents surveyed turn to their devices to pay a bill (55%), make a bank transfer (52%) and set up a new account (48%).”

Needless to say, the “half pay bills with a mobile device” snippet has caught the eye of many people, even making the headline of a Bank Technology News article.


There are a couple of things to keep in mind when evaluating this 55% statistic. First, the study was conducted in 17 countries, so the number of consumers in the US that pay bills using a mobile device may be very different. 

And, in fact, it is. A study conducted by Aite Group on how US consumers pay monthly bills (tracking 15 of the most popular bills that account for ~85% of all bills paid), the percentage that pay any of these bills on a smartphone can be counted with the fingers on one hand. If you consider a tablet to be a mobile device, then you won’t need more than the other hand to total up the percentage.

The second factor to consider is that, according to SAP’s press release regarding the survey, “the research was conducted with 12,424 adults over the age of 18 globally who own a basic mobile or smartphone device.” In other words, we’re not talking about all consumers.

In the US, very few consumers pay bills (or do any kind of mobile banking, for that matter) with a feature phone. If that’s true in other countries — and I have to believe that in economically developed countries like the US, sane consumers pay bills on a PC or laptop instead of a feature phone — then we’re talking about a maximum of 75% of the population in any country that has a smartphone.

In fact, in the 46 countries tracked by Google, smartphone penetration is less than 50% in more than half the countries. Which means that to get to “55% of consumers pay bills with a mobile device,” the percentage of smartphone owners that pay bills with their smartphone would have to be astronomically high.

20130925 smartphone


For a different perspective, let’s look at the percentage of all monthly bills are paid with a mobile device (not the percentage of consumers). According to Aite Group’s research, you can chop a couple of fingers off your hand and still have enough digits to count up the total.

Another mobile bill pay reality: Two types of monthly bills account for 25% of all bills paid with a mobile device. And utilities — which comprise the most frequently paid bill type — is not one of these two types.


I’m not disparaging or criticizing SAP’s study (I can still feel the pain I had to endure the last time I commented on a vendor’s research).

Instead, I’m trying to get you to think more critically about interpreting research numbers, and to understand the sample and sampling methodology before drawing conclusions.

The mobile bill pay reality — in the US, at least — is that nowhere near half of consumers are using a mobile device to pay their monthly bills.

Blazing New Trails In Financial Services (Or Why PerkStreet Failed)

Once again, I’m late to the blogging party, following on the heels of (yet another) great post from NetBanker, this one about the news that PerkStreet will be closing its doors:

“My guess is they were done in by the problem that every financial startup faces: It’s really, really, really hard to get customers to send money to a web-based startup, especially when there is no immediate short-term gain. Also, while Perkstreet had a great consumer-advocacy positioning, “use debit, avoid credit,” that was a bit of a mis-match for the customers they were targeting, big-spending rewards junkies which could afford to park $5,000 at the startup. Most existing big spenders are fond of using credit card programs with similar rewards, so changing their behavior was a continual challenge.”

My take: The reality for financial start-ups is that while blazing a new trail through an uncharted forest, sometimes you run into a brick wall. You can cut down a tree, but you can’t cut down a brick wall. PerkStreet hit a brick wall. And the sign on the wall read “Caution: Consumer Apathy About Financial Services Ahead.”


PerkStreet wasn’t targeting big-spending rewards junkies.

Big-spending rewards junkies are typically over the age of 45, earn more than $100k a year, and have been with their preferred credit card issuer for a long enough period of time that switching their spending to not just another card, but from a credit card to a debit card, just wasn’t going to happen.

Instead, PerkStreet was targeting consumers who are fed up with traditional banks and bank accounts, and looking for an alternative. In other words, they were targeting the Debanked.


The Debanked are (relatively) young, and while they don’t earn as much as rewards junkies, that’s more a factor of age than anything else. The Debanked are a highly educated group of consumers. They might not be earning much today — but they’re likely to in the future (if the economy ever gets back on track, that is).

The problem for banking pioneers is that the Debanked is a very small segment of consumers. NetBanker may be correct that “It’s really, really, really hard to get customers to send money to a web-based startup,” it’s also really, really hard to succeed when the number of consumer who are willing to send money to a startup is small.

The questions banking pioneers must address are: Why is the Debanked segment so small? What can we do to grow the Debanked segment?


My theory for why the Debanked is small is that it boils down to Customer Apathy. We just don’t care that much about financial services to seek out and use new alternatives. We probably spend more time figuring out which restaurant to eat at on a Saturday night than what bank to do business with.

Take a look at this data from Distimo. Nearly 2,300 different game apps have cracked the Top 25 best selling paid apps. Only 30 financial apps have made that list.

20130815 PaidApps

What this data tells me is that If you’ve got a new game app you want to launch, you’ve got a better shot at getting consumers’ money than if you’ve got a new banking idea.


I’ve got another data point that highlights the problem start-ups have in the financial services space.

While the press (not to mention credit unions) love to point out how disillusioned people are with big banks — and how Gen Yers are going to change and disrupt everything, reality tells another story.

According to a recent Aite Group survey, nearly half of Gen Yers consider a large national bank to be their primary FI. That’s a higher percentage than any other generation.

20130815 PrimaryFI

Just one in five Gen Yers — or Gen Xers, for that matter — consider some “other” type of FI (i.e. not a bank or credit union) their primary FI. For most of them, it’s a brokerage, advisor, credit card firm, or insurance firm that they name as their primary FI — not a start-up alternative.

The self-proclaimed disruptors in financial services would like us to believe that there are hordes of consumers chomping at the bit to leave the big, evil, mega-banks. It’s just not so. Why? Because people just don’t care that much about financial services.  


So what’s the answer to the second question: What can we do to grow the Debanked segment?

I’ve got some ideas about that, but I think my boss would prefer that i not spill all my candy in the lobby. 

Related research: Credit Union’s Biggest Enemy
Related research: The Debanked: The $1.7 Billion Threat to Banks

Banks Need To Redefine Personal Financial Management (PFM)

As usual, NetBanker nails it with its post on Will mobile finally make PFM popular? In it, Jim writes:

“Mobile is, and will be, a huge driver for specialty PFM apps. App stores help consumers find the services, and mobile makes them less daunting to use. But it’s not just the mobile platform driving usage at these four challengers (see below), it’s the way they have positioned themselves with tangible consumer benefits (e.g., save money by spotting fraud charges) rather than the nebulous (e.g., “manage your spending for a better life”). Parsing this list a little closer, only Mint is positioned as a pure PFM. The challengers are all backing into PFM from various niches.”

He then goes on to talk about BillGuard, Lemon, Credit Karma, and Manilla.

My take: 1) NetBanker is spot on that mobile is — and will be — a huge driver for specialty PFM apps. Consumers are showing a strong willingness (if not desire) to download and use apps that have a very (or relatively) narrow set of functionality. It’s incredibly easy for someone to download an app, test it out, and see if it add values. And there’s data that shows that finance apps are doing well with consumers, compared to other types of apps. The following chart shows app “loyalty” as defined by Flurry:

20130802 FlurryThe chart shows that relative to a number of other category of apps, Financial apps are used an above average number of times per week (usage), and that consumers keep Financial apps on their mobile device an above average length of time (retention). Since Flurry gets its data from apps developers, I don’t think bank/credit union apps that provide account access is included in this data (I could be wrong about that).

2) NetBanker may be overstating the ability of app stores to “help consumers find the services.” A recent visit to the Apple apps store revealed six pages of apps that begin with the letter A. I couldn’t even begin to count how many pages of apps there were all together. An analyst with Canalys (a firm that tracks the apps market) recently said: “When we speak with app developers, many are concerned about monetization or platform fragmentation, but the number one problem they face is getting their apps noticed.”

3) The last two sentences in the quote above really intrigued me: “[O]nly Mint is positioned as a pure PFM. The challengers are all backing into PFM from various niches.” What’s a “pure” PFM? Why does NetBanker think the firms listed in the post are “challengers” to Mint? And why does NetBanker think those challengers are “backing into” PFM?


The core of the issue here is simple: There is no clear definition about what PFM is (and isn’t). There is no common understanding — among bankers or consumers — about what PFM is. I don’t have research to back me up, but I’m willing to bet that if you showed a representative sample of consumers a list of companies that included Mint, BillGuard, Lemon, Credit Karma, and Manilla, and asked: “Which of these companies offers a “pure” PFM?” you would get blank stares from 98% of them.

Even among bankers, the term PFM is too loosely used. I (think I) know exactly what Jim means when he refers to Mint as a “pure” PFM — a PFM platform that offers budgeting, expense categorization, and charting/forecasting/analysis tools. Geezeo and Money Desktop, which choose to offer their technologies through FIs, rather than direct to consumers like Mint, are probably considered “pure” PFM tools,  as well. The term PFM has come to mean “budgeting, expense categorization, and charting/forecasting/analysis tools” in the banking community.

But the majority of consumers have shown little interest in these types of capabilities. Instead, they want to know their credit score, how it’s changing, and what to do about it (Credit Karma), or they want to track or prevent grey charges on their debit and credit cards (BillGuard).

These capabilities are “personal financial management” capabilities. They’re not “backing in” to PFM. They ARE PFM. And they’re not challenging Mint (or other “pure” PFM platforms) — they’re providing additional capabilities not found in Mint.


I’m a big fan of what the “pure” PFM players are doing. But bankers need to redefine their concept of PFM, and expand the definition to include a wider range of “PFM” capabilities.

What they’ll realize is that their “pure” PFM deployments fall well short of providing the range of capabilities that consumers want and need. And they’ll realize that their”pure” PFM deployments need to become more of a platform that integrates the “challengers” into the platform.

It won’t be the Apps Stores that help consumers find the “specialty” financial apps out there. It will be the banks and credit unions. The FIs will vet the apps, recommend to their customers which ones are good, safe, and can be integrated. Consumers will pay for these apps, and FIs will get a cut of the revenue for helping the developers reach a wider base of users.


To get back to the core question of the NetBanker post — “will mobile finally make PFM popular?” — the answer is: “It depends on how you define PFM.”

If you continue to have a narrow definition of PFM (i.e., budgeting, expense categorization), then the answer is NO.

On the other hand, if you define PFM more broadly, then the answer is YES.


But a lot of bankers still won’t grasp the strategic importance of this.

It represents a shift in the underlying value of banking.

The old value was “money movement.” Banks were (still are) good at moving money. You parked your paycheck in the bank, then wrote checks (and more recently swiped your debit card) to the places and people you did business with, and the bank took care of all that.

The new value is “money management.” Despite the flagging economy and all the talk of the “1%”, the numbers don’t lie: Compared to even 20 years ago, our (Americans’) earning and spending power is as strong as ever.  But many of us don’t need help allocating and investing assets, and we don’t really need or want help to do budgets or categorize expenses.

There’s a whole bunch of stuff in the middle (where budgeting is at the bottom or left, and investing assets is at the right or top). Things like what BillGuard, Lemon, Credit Karma, and Manilla (and other “specialty” PFM providers) do.

Helping consumers not just make smart choices about how they spend their money, but what tools they use to track, spend, and manage their money could be — I think it WILL be — the way FIs compete in the future.

Debunking The New York Times’ Banking BS

I really don’t know how so many of you put up with the New York Times. Mrs. White’s 3rd grade newspaper at the Bearsville (NY) Elementary School demonstrates better quality journalism. In a (typically) shoddy piece titled Over a Million Are Denied Bank Accounts for Past Errors (not going to link to it, you can find it yourself), the author writes:

“Mistakes like a bounced check or a small overdraft have effectively blacklisted more than a million low-income Americans from the mainstream financial system for as long as seven years as a result of little-known private databases that are used by the nation’s major banks. The problem is contributing to the growth of the roughly 10 million households in the United States that lack a banking account, a basic requirement of modern economic life. The ranks of those without bank accounts have swelled — up more than 10 percent since 2009, according to the FDIC.  [T]he databases have ensnared millions of low-income Americans, according to interviews with financial counselors, consumer lawyers and more than two dozen low-income people.”

I’m sure those 25 low-income people were representative of the overall low-income population in the US (sarcasm).

There are a few problems with the Times’ article:

1. Databases don’t “ensnare” anyone. Poor choice of words on the Times’ part, but what do you expect from a paper trying to emulate the National Enquirer? In any case, the databases track incidents, not demographics. According to a recent survey by Aite Group (sample size of 1,242, not “two dozen”), 51% of the consumers who were hit with an overdraft fee in 2012 earned more than $45k — i.e., not “low-income Americans.” Looking at it from a different angle, among Americans earning less than $15k, 24% paid an overdraft fee in 2012. Among consumers earning between $70k and $100k, 25% paid an overdraft. These consumers are in the databases, by the way.

2. The ranks of the unbanked have not “swelled.” The 2011 FDIC National Survey of Unbanked and Underbanked Households (which the NY Times was quoting from) found that 8.2% of US households were unbanked. As the FDIC put it, “the proportion of unbanked households increased slightly since the 2009 survey.” Maybe the Times’ spell checker inadvertently changed “slightly” to “swelled.” Hey, it could happen. In the Aite Group survey, the percentage of consumers qualifying as unbanked was 7.2%. Allowing for some margin of error, the unbanked ranks are not getting any bigger, let alone swelling.

3. A bank account is not a “basic requirement of modern economic life.” When asked why they didn’t have a bank account, the Unbanked don’t list “denied by past errors” as the main reason. Here’s what they do say:

How important are the following reasons for why you don’t have a checking account? A very important reason Somewhat of a reason Not a reason
If I run into a credit problem, I don’t want money withdrawn from my account without my permission 49% 17% 34%
I don’t want to pay a bank’s monthly fees 39% 25% 36%
I prefer to use a prepaid debit card 37% 24% 39%
Banks charge all sorts of fees, like insufficient fund fees, when a check bounces or a debit card is overdrawn 36% 26% 38%
I don’t want to maintain a minimum balance 30% 33% 37%
I have or had a credit issue or problems with a checking account in the past 29% 26% 45%
I need to have access to cash right away 22% 34% 44%
I prefer places where I can cash a check and pay my bills at the same time 16% 27% 57%
Banks’ hours are not convenient for me 4% 16% 80%
At banks, the service is slow 4% 28% 67%

Source: Aite Group survey of 1,242 US consumers, Q2 2013

Only 29% said that past credit issues or problems explained why they don’t have a checking account, and in fact, nearly half (45%) flat out said past problems were not a reason why they don’t have an account.

On the other hand, 37% said that the reason they don’t have an account is that they “prefer to use a prepaid debit card.” In other words, they could get a checking account if they wanted to — but they don’t want to. They’ve discovered that a checking account is not a “basic requirement of modern economic life.”


Reading trash like this NY Times article makes me wish that The Onion would do a piece on “Millions Denied A Mercedes-Benz Because They Don’t Have Enough Money.” Not only is the Times’ off-base conceptually in its attempt to vilify the banking industry, it’s wrong factually.