Jan 142013

Many Community Banks and Credit Unions provide a great service to the community in the form of free checking accounts.  And many in the Community Bank and Credit Union sector are rightfully proud of their contribution and support of the community.

Unfortunately, the big win for consumers results in a huge loss for Banks and Credit Unions which jeopardizes the viability of the very institutions providing the service.  The reality is that most consumers do no need or want anything more than a checking account (accompanied by a debit card and perhaps direct deposit & bill pay).  These limited set of products require substantial scale before a provider can generate economies of scale to produce a profit; and by definition, this excludes Community Banks and Credit Unions.  Because of this, most Community Bank and Credit Union customer relationships result in recurring, non-recoverable annual operating losses.

Understanding this, Community Banks and Credit Unions must be extraordinarily careful in who they choose to serve, what products and services they choose to provide, which channels they emphasize, how they price products and services, and how they market their services in a very crowded and largely un-differentiated marketplace.

The infographic developed by NetCredit (below) shows that roughly 50% of Americans live paycheck to paycheck, and a recent Schwab study indicates that nearly 75% of Americans have less than 6 months of cash savings.

Americans living paycheck to paycheck, NetCredit

1 in 2 Americans Live Paycheck to Paycheck, NetCredit.com, December 2012

I will submit to you that most of these 50% of Americans – those living paycheck to paycheck and those without access to emergency funds – are highly unlikely to obtain any type of a loan from a Community Bank or Credit Union (with the possible exception of payday loans and other such programs).  Further, most of these Americans are unlikely to want or need anything other than a checking account.  And purely from a business point of view, banking relationships with this segment of consumer cannot be profitable for Community Banks and Credit Unions.  As a result, some 50% of the population… and much higher percentage in some geographies … represents a poor customer prospect for Community Banks and Credit Unions.

This information, in part, begins to define customer segments that are able to help Banks and Credit Unions grow and operate profitably.  Unsurprisingly, the answer for most Banks and Credit Unions begins with a sound and actionable strategy that delivers near-term results while positioning the institution for long-term success.


Serge Milman

Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants which provides Strategy, Finance and Operations Management Consulting services. He is also the Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. Serge can be reached at info@SFOconsultants.com.

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