BankNotes ...

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.