The Rise of Alt-Banking Options: Consumers No Longer Have to Dance with the Ones Who Brought Them

The Rise of Alt-Banking Options: Consumers No Longer Have to Dance with the Ones Who Brought Them

The Rise of Alt-Banking Options

Russell Moore

Russell Moore

Currently an innovation director at TSYS, Russell Moore has worked in the product development and innovation world for 15 years. He is an advisor for the Technology Association of Georgia, BTC Media and several financial institutions.

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There are more banking options than ever, yet many consumers around the world still live paycheck-to-paycheck. This dichotomy is one of the main reasons the 'alt-banking' niche has grown so much in recent years and why many of us in the financial industry are asking, "How can we help the more than three billion people outside traditional banking grow and better their lives?"

There’s no shortage of options for those who might fall outside the realm of traditional banking. With the rise of cryptocurrency and the growth of powerhouse banks like Capital One and fully online banks like Simple Bank, alternative banking options abound and are pushing the boundaries of how we interact and think of money systems. Change is here. This means traditional — and even some progressive — financial institutions have a steep learning curve if they want to overcome these competitive disadvantages.

The consumers working outside the traditional tend to fall in three categories — unbanked, underbanked and overbanked. Each has their own strengths and, no matter the option, the grass may seem a little greener on the other banked side.

Unbanked

Having no ties to traditional banking services, like checking accounts and credit cards, earns a consumer the label of 'unbanked.' Whether consumers are self-described 'doomsday prepper' types who have no trust for government-insured financial intuitions or have been forced out of mainstream banking due to fees and high minimum balances, being unbanked today is not as bad as it could be.

There does exist a stigma about the unbanked and the financial resources they rely on. But, despite this, most who use services like check cashing, payday lenders and prepaid cards, know exactly where every cent goes. The issue for them is not a lack of management or knowledge of their financial situations – it's the fees.

A consumer with an income of $15,000 a year who cashes a monthly paycheck at a store offering the New York standard interest rate of 1.91% could spend up to $286 a year in check cashing fees alone. However, savvy consumers can work around those fees by using services like store brand money cards to load the funds with little to no fees. Walmart does this with their MoneyCard. Or they can have funds deposited to a prepaid card, such as one from Netspend or Mango. Living as an unbanked consumer is no longer a punitive sentence; for many, it is becoming a viable choice.

Underbanked

It's possible to have one foot in unbanked waters and still hold onto a few traditional banking services. For example, a consumer might use a traditional checking account and carry a bank card, but may take out a payday loan when the need arises.

These often disenchanted consumers find themselves under attack from high fees pushed on those with lower incomes. Since they still rely on traditional banking for at least some of their financial transactions, the underbanked are a large target for the predatory side of banking.

Most states have laws that require them to offer services to the underbanked; however, it is not mandatory that banks advertise those offerings. Rather, these institutions push higher-fee services on them. Eventually, when they are no longer able to pay overdraft or other fees associated with their account, these consumers move into the unbanked category. This group uses both traditional and alt-banking services, like credit unions. If they are digitally adept, they might also add peer-to-peer products like Venmo and Crypto.

Overbanked

Do you maintain more than three deposit accounts? If yes, then you are considered overbanked. These consumers are typically offered better rates and can take advantage of perks like rewards, cash back and slick online services. But the reality is that nothing is free and having multiple accounts that you don't keep up-to-date can cost you.

Traditional services are seeing huge potential loss with the rise of consumers reevaluating their financial situations and incorporating alt-providers. Tailored products for every consumer will drive change and may bring back a little loyalty, but the wide variety of alt-banking options places customers in charge and lets the overbanked pick and choose which services –– alt or traditional –– fit them best.

Regardless of their label, consumers are benefiting from becoming more aware of their digital and information footprint. And financial institutions do have the ability to keep up, and in some cases, beat these new trends. The question is whether they are willing to compete with or even invest in the fast paced future of alt-finance.

Consumers are beginning to expect an experience that is specific to their needs and lifestyle and financial institutions that adapt can provide something that nameless, faceless alt-services cannot –– customer service. And when they can combine that with a full spectrum of services and resources that compete with alt-banking services, consumers aren’t the only ones who'll win.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

Other Articles by Russell

Russell Moore

Currently an innovation director at TSYS, Russell Moore has worked in the product development and innovation world for 15 years. He is an advisor for the Technology Association of Georgia, BTC Media and several financial institutions.

He eats, sleeps and breathes innovation. Whether he’s at home on his Alabama farm or exploring new payments technology products in an innovation lab, he is always searching for a new, more profitable way to build a better mouse trap.

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