Financial institutions are increasingly exploring unbanked and underbanked banking services as they look for new sources of revenue and opportunities to build relationships with consumers outside the traditional banking system. Products such as prepaid cards, short-term loans, check cashing, and money transfers can give these consumers access to financial services they might otherwise obtain from alternative providers.
However, the fees associated with some of these products are drawing increased scrutiny. As banks expand their offerings to underserved consumers, they must balance the potential for new revenue with questions about pricing, consumer protection, and the long-term value of establishing sustainable banking relationships.
From a New York Times article:
When David Wegner went looking for a checking account in January, he was peppered with offers for low-end financial products, including a prepaid debit card with numerous fees, a short-term emergency loan with steep charges, money wire services and check-cashing options.
“I may as well have gone to a payday lender,” said Mr. Wegner, a 36-year-old nursing assistant in Minneapolis, who ended up choosing a local branch of U.S. Bank and avoided the payday lenders, pawnshops and check cashers lining his neighborhood. Along with a checking account, he selected a $1,000 short-term loan to help pay for his cystic fibrosis medications. The loan cost him $100 in fees, and that will escalate if it goes unpaid.
An increasing number of the nation’s large banks — U.S. Bank, Regions Financial and Wells Fargo among them — are aggressively courting low-income customers like Mr. Wegner with alternative products that can carry high fees. They are rapidly expanding these offerings partly because the products were largely untouched by recent financial regulations, and also to recoup the billions in lost income from recent limits on debit and credit card fees.
Banks say that they are offering a valuable service for customers who might not otherwise have access to traditional banking and that they can offer these products at competitive prices. The Consumer Financial Protection Bureau, a new federal agency, said it was examining whether banks ran afoul of consumer protection laws in the marketing of these products.
Banks See Opportunity in Serving the Unbanked and Underbanked
Financial institutions are increasingly reaching out to the unbanked and underbanked population, both as a way to increase overall revenues, but also to establish relationships that can grow over time.
Building Long-Term Banking Relationships
Some of this population includes younger customers who are just starting out in their professional lives, and will need future banking services. For others, improving macroeconomic conditions will also provide opportunities for additional banking products and services in the future. Because of these factors, many financial institutions are keeping their options open as to how best to reach the estimated 30 million consumers who are unbanked or underbanked.
The estimated 30 million unbanked or underbanked consumers represent a substantial opportunity for financial institutions, particularly as banks seek new sources of revenue and ways to establish relationships with consumers earlier in their financial lives. Alternative financial products can provide an entry point for customers who may not currently qualify for or use traditional banking services.
The longer-term opportunity in unbanked and underbanked banking services will depend on whether financial institutions can turn those initial interactions into lasting customer relationships. Younger consumers may eventually require a broader range of banking products, while improving economic circumstances could allow other customers to transition toward more traditional services. Banks that provide useful products at competitive prices while addressing concerns about high fees could be better positioned to retain these consumers as their financial needs evolve.
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