By: Joel Graves, Senior Consultant and Neil Hartman, Senior Manager
In a mature banking industry, emerging or untapped markets are few and far between. Bankers approach new opportunities with a heightened skepticism in light of market events that have unfolded since autumn of 2008. Yet, on the margins exists a market segment of untapped, underserved, and … unbankable? We believe this segment may be worth a second look.
Defining the market
In order to adequately target the “underserved” market, it helps to begin with the classifications commonly used in the market today:
- Unbanked: Individuals who have rarely, if ever, held a checking account, savings account, or other type of transaction or check cashing account at an insured depository institution. (FDIC Survey of Bank’s Efforts to Serve the Unbanked and Underbanked)
- Underbanked: Individuals who may have an account with an insured depository institution, but who also rely on non-bank, alternative financial service providers for transaction services or high-cost credit products. (FDIC Survey of Bank’s Efforts to Serve the Unbanked and Underbanked)
- Unbankable: Individuals who do not currently qualify for traditional depository or transaction accounts with an insured financial institution due to a number of reasons, not withstanding socio-economic condition.
According to a study conducted by Catherine Rampbell (‘Unbanked’ America 2009), more than one in four households could be considered underbanked or unbanked in the United States, with the majority of these households residing in low-income areas. Additionally, a disproportionate percentage of the underbanked population is comprised of minorities and less educated. As banks look globally, the number of underbanked households grows to almost 50 percent.
While these statistics may not be shocking, especially considering the global economy over the past four years, what is interesting is the number of institutions that do not have a program to address this market—from either a revenue stream perspective or philanthropic perspective. According to the FDIC, only 18 percent of banks currently offer services directed at penetrating this market in any meaningful manner.
What is the opportunity for banks?
In order to effectively and sustainably enter into this market, financial institutions must challenge the status quo with innovation and willingness to broaden their capabilities. Many traditional banking products and services will not meet the needs of the underserved market. So how can a financial institution enter into this market?
CoME-IN, a FDIC Advisory Committee on Economic Inclusion, identified four feasible models for serving the unbanked: through partnerships, by targeting new entrants, by focusing on re-entrants, and through cross-selling. Let’s take a closer look at how banks can employ these models.
The Partnership Model focuses on non-profit organizations such as the United Way or the YMCA and relies on leveraging these organizations as channels to raise awareness and educate individuals on financial responsibility. This is an area where banks can be extremely innovative, depending on their appetite for the unconventional, and take a philanthropic approach to educating today’s and tomorrow’s generation of consumers. The key is providing the knowledge necessary to allow the underbanked to become self-sufficient when handling their finances, and more importantly, educating them on the additional costs associated with mishandling finances such as high interest rates on pay-day loans, increased interest rates for missed payments on revolving accounts, and lack of available options as financial health deteriorates. The benefit of this approach is that many underserved consumers are more likely to participate in these types of programs through organizations whose primary goals are focused on helping communities in need. Banks that devote part of their strategy to this model can introduce banking products and services focused on helping the underserved market and, by doing so, transform the underserved today into bank customers of tomorrow.
The New Entrant Model focuses on driving usability of banking products into channels commonly used by the underbanked market. One theme that resounds in this market is the lack of familiarity of traditional banking products and services, which historically has been an obstacle. This is becoming more evident in the younger generations of consumers who are growing up in an age where competition from non-traditional financial services companies is eroding the future banking customer base. It can be attributable to the increased penetration of mobile devices such as the smart phone, which is increasingly making it easier to conduct transactions outside of traditional banking walls. According to a study conducted by Javelin Research, 74 percent of the underbanked population currently utilizes a mobile phone, compared to 68 percent of the traditionally banked market. This data suggests that penetration through technology warrants consideration, and that a targeted mobile strategy can help introduce traditional banking services as an alternative to non-traditional competition.
The Re-entrant Model is a strategy focused on the unbanked who previously had traditional services but may be consumers on ChexSystems for a reason other than fraud. One of the primary disincentives for focusing on this group has been the perceived inherent risk associated with banking customers who have had problems managing their financial health. This market, however, provides an opportunity for banks that offer low-risk products and can help to build customers’ financial well-being. Products like traditional savings accounts, pre-paid cards, and even secured credit lines allow consumers with a problematic financial history to rebuild and, at the same time, offer banks an additional revenue stream. Additionally, innovative products like the Model Safe Account (sponsored by the FDIC) can provide additional revenue streams while helping to minimize risk and increase the image of the bank within the communities it serves. (FDIC Model Safe Accounts, FDIC.gov)
The Cross-Selling Model is one which with many banks struggle when it comes to traditional banking customers, much less the underbanked segment. One of the keys to employing a strategy around cross-selling is empowering and educating the bank’s service channels to identify opportunities and recommend appropriate solutions. As with any cross-selling strategy, one of the drivers of success is understanding the bank’s current customer base and making sure the applicable products and services are available to meet the needs of those customers. For example, consider a situation where a consumer comes into a bank branch every Friday to cash a payroll check, but she doesn’t have an account at the bank. If the teller line is equipped, bank employees could quickly identify products and services that would fit the individual’s situation, such as a pre-paid card that could be reloaded as an alternative to coming into the branch each Friday.
The underbanked markets represent over 25 percent of total households in the United States. By definition, it is an potential revenue stream that few institutions are maximizing today. By understanding the geographies in which a bank does business and deploying the proper model or models to enter the market, the bank can generate additional revenue streams, increase its stature within the community, and help shape the future financial behavior of a historically ignored segment.