Banks throughout the country are continuallysearching for new markets to serve and products to serve them. Thisis natural evolution: As markets become saturated, bankers eitherevolve the product set or search for new customers whose needs arenot being met. The unbanked and underbanked have perennially falleninto the latter category for retail banks across the country and infact, around the world. This group, also known as the “underserved”(perhaps a more accurate term), is defined in a myriad of ways.(See the newly released Mercator Advisory Group Research Notetitled Online Cash Payments: Threat orOpportunity?, which discusses this segment in moredetail.)
The general definitions of the underserved used by the FederalReserve Bank in its 2011 Study of the Unbanked and Underbanked areas follows:
- Unbankedhouseholds are those that do not have anyone resident in thehousehold who currently owns a checking or savingsaccount.
- Underbankedhouseholds are those that have a checking and/or a savings accountand have used nonbank money orders, nonbank check cashing services,nonbank remittances, payday loans, rent-to-own services, pawnshops, or refund anticipation loans in the past 12months.
Some banks and nonbanks have tested and rolled out servicestargeted at the unbanked and underbanked segments. Unfortunately,many other banks have avoided these segments out of fear that theseconsumers are either too poor and unprofitable to serve or wouldrequire too much in terms of bank resources to support. The realityis that many of these prospects are good, potentially profitableconsumers for whom fee-based services are the norm. Among theseconsumers are recent immigrants, students, or widows and widowers,all with potential life-stage financial product opportunities.These opportunities will be discussed in an upcoming ResearchReport from Mercator Advisory Group’s Debit Advisory Service.
In addition to the fee-based financial products (such ascheck-cashing services, prepaid card products, or money transferservices/P2P services), one can envision marketing selected creditproducts to this same potential customer base. LexisNexis conducteda study in 2012 that found 15-20% of unbanked and underbankedconsumers were in fact creditworthy and would generate a prime orbetter risk score using alternative risk data. Thiscredit-qualified subset of the underserved consumer base could beoffered either installment or revolving loans/credit cards.
In this period of profit compression on debit cards, it is time forbanks to focus on expanding their customer universe by looking forways to serve the financially underserved.