Financial Services for the Underserved – Part 2: Defining ‘Underserved’

Blog: financial instrumentsThis three-part series will discuss the underserved, a population of Americans whose financial needs are not entirely being met by mainstream financial services’ institutions-

In part one, I referred to a USPS report released in early 2014 (1). In a bid to grow its revenue, the USPS determined that it was well-positioned to ‘provide non-bank financial services to those whose needs are not being met by the traditional financial sector’. These individuals – collectively, the underserved – are much more than just subprime consumers. They represent a broad spectrum of the population, and come from many demographic, economic, and ethnic backgrounds. I concluded that these consumers – some 68 million, according to the USPS report – represent a great opportunity for financial services’ institutions.

In a recent piece from the Financial Brand (2), Joan Susie from Bank Director (3) agrees that retail institutions are missing an opportunity. Susie says that if banks don’t seize the opportunity, other players in the financial industry will:

“With well priced and carefully conceived products, these customers can be profitable,” Susie says. “Large banks, non-bank financial services companies and a few community bank pioneers are quickly realizing there is an even better reason than CRA (Community Reinvestment Act) credits to bank new immigrants and other underserved populations. It is becoming clear that the biggest and savviest financial institutions are actively exploring ways to profitably provide access to credit and financial services for a significant segment of the population struggling financially.”

The Unbanked and Underbanked
According to the FDIC National Survey of Unbanked and Underbanked Households (4), over 30 million US households are either unbanked or underbanked:

  • 9 million households are unbanked, and possess no checking or savings account;
  • 21 million households are underbanked. They possess a checking or savings account but principally use Alternate Financial Services (AFS).

Financial institutions use summarized credit data as a qualifier for their products. Individuals who don’t possess or use traditional financial instruments do not create a significant public record footprint against which summarized credit statistics can be evaluated. As a result, these populations are typically overlooked by financial institutions – and are subsequently under-marketed.

The Debanked
In addition to the Underbanked, 30 million additional households have willingly debanked. The Aite Report (5) defines debanked households as those that have opted out of the traditional financial system. The debanked are young, highly educated, employed (or employable), and manage their financial lives without the help of a checking account. Aite estimates that the debanked represent $30-40 billion in deposits and nearly $1.7 billion in revenue (including overdraft fees, monthly fees, lending fees, and debit interchange) to the banks. For these individuals, the allure of AFS are especially appealing.

“The FDIC and the Consumer Financial Protection Bureau have been pretty vocal about the fact that they want to decrease consumer use of alternative financial services,” says Emily McCormick with Bank Director. “Will these regulators make a move to ensure that more Americans have access to a bank account?”

…and, subsequently, more creative financial services’ options?

(read more in the final installment: 5 Observations About the Underserved)

Reference articles:
1) Post Office Could Rack Up Billions by Offering Money Services
2) Do Financial Institutions Want the Unbanked?
3) A Missed Opportunity
4) 2013 FDIC National Survey of Unbanked and Underbanked Households
5) The Debanked: A US$1 Billion Prepaid Debit Card Opportunity