The FDIC has just released the results of a national survey pertaining to banks’ efforts to reach unbanked and underbanked individuals and households. This demographic is widely recognized as untapped potential for the banking industry—but industry efforts to move unbanked customers into traditional checking, savings and credit products have not been consistently successful.
The survey, conducted by Dove Consulting, was designed to quantify the efforts of banks to meet the needs of the unbanked/underbanked demographic, to identify the challenges associated with serving this market, and to identify innovative products and services which appeal to this target customer.
Outreach plays pivotal role More than 25 percent of respondent banks recommended the use of outreach programs to bring unbanked households into the conventional banking system. The bank employees tasked with designing appropriate outreach programs can turn to local employers, labor unions and community organizations to gain deeper insights into the needs and motivations of the targeted group. Alliances with these local organizations can also be leveraged by the bank to build awareness and trust quickly within the community.
Improved access The traditional bank branch, with its limited hours and relatively formal setting, may be off-putting to this customer demographic. To address these concerns, banks might consider broadening customer access via kiosks, extended hours, web access and phone service. Some banks also reported success with hiring staff members who are fluent in foreign languages.
Specialty products and services Banks nationwide recognize the importance of the check-cashing service to unbanked customers. Many institutions, unfortunately, are reluctant to take on the risk associated with offering this service. A secondary barrier is the inability for many unbanked individuals to produce acceptable forms of identification.
Money orders, international remittances and bill payment services were also identified as service offerings that would appeal to unbanked individuals. Of the banks that responded to the survey:
• 49 percent offer check-cashing to non-customers.
• 37 percent offer bank checks and money orders to non-customers.
• 6 percent offer international remittances to non-customers (32 percent of respondents cited regulatory concerns as a barrier to offering this service.
Downsized credit products Entry-level credit products are useful in helping the unbanked individual enter or re-enter the economic mainstream. Prepaid cards and debit-card accounts are two services that often resonate well with this customer segment. Secured credit cards, tax refund anticipation loans and other advances on funds that are due to arrive were also recommend, although these services are not widely offered by mainstream banks.
Banks’ interest in providing these alternate services varies widely. There is a perception that the costs and risks associated with catering to the unbanked group will fall outside the bank’s strategic parameters. The FDIC’s survey did reveal, however, that 77 percent of banks had not conducted any research on the potential unbanked customers in their areas—which could mean that the reluctance to provide tailored products and services to this group is largely based on unproven assumptions.
The FDIC’s survey did not delve specifically into the long term value of the unbanked customer—but it is generally believed that these individuals, once obtained, can be transitioned into conventional banking services over time.
Survey methodology The surveys were sent out by mail to a nationally representative sample of 1283 banks with brick-and-mortar branches. Six hundred eighty-five surveys were returned; at the time the survey was conducted, the respondent banks represented $8.3 trillion in assets or 70 percent of the total assets within FDIC-insured institutions.
The FDIC Advisory Committee on
Economic Inclusion (ComE-IN) will hold a public meeting this week to discuss
ways that the banking community can reach out to currently underserved households.
The meeting will be held on February 5, 2009, between 8:30 a.m. and 4:00 p.m.
in the FDIC Board Room; it will also be viewable via webcast at http://www.vodium.com/goto/fdic/advisorycommittee.asp.
The topic of underserved or
“unbanked” customers has been a prominent discussion point in the banking
industry for several years. These are individuals or households that rely on
non-banking institutions, such as check-cashing stores or even retailers, to
conduct regular monetary transactions. Generally, these unbanked customers
absorb considerably higher transaction costs than if they maintained a
traditional depositor relationship with a bank.
Sizeable market opportunity
The Center for Financial Services
Innovation estimates that there are nearly 10 million unbanked households,
spending roughly $13 billion per year on non-bank financial transactions.
Clearly, this represents a sizeable market opportunity for traditional banks.
Unfortunately, understanding how to reach these customers with a compelling
service offering continues to be something of an unsolved mystery.
Research indicates that many of the
unbanked group have previously had traditional banking relationships. At some
point, these individuals became disgruntled with the banking system and chose
to leave it voluntarily. Key Bank learned this in 2004 through a series of
focus groups—respondents indicated they’d had bad experiences with banks, often
involving high fees for minor transactions.
A research report based on the PaymentDynamics
2007 Preferred Payments Study makes a similar conclusion, but adds that the
unbanked group is not one homogenous demographic, but “a collection of smaller
segments, each with its own unique demographics and financial characteristics.”
That conclusion supports the notion that effectively pursuing unbanked
households as a customer segment demands a multifaceted approach. The PaymentDynamics
report is available here: http://www.edgardunn.com/uploads/100030_english/100243.pdf.
Reaching out, improving access
Both the banks and unbanked
consumers stand to benefit from the development of products and services that
will appeal to this customer group. The customers will save money on their
financial transactions and begin moving down a more traditional path of
wealth-building. Banks will enjoy a larger customer base, and many of those new
customers can be directed into conventional banking services over time. The
challenge lies in creating products and services that meet the bank’s profit
hurdles while addressing the needs and lifestyles of this customer group.
To learn more about this
underserved market and the role it will play in the banking industry going
forward, log-on to the FDIC Advisory Committee meeting webcast on Thursday.
Scheduled discussions will include an overview of the FDIC’s Unbanked Survey
and a review of the banking industry’s successful efforts to date in reaching
the unbanked customer.