Raj Date made a big impact at the CFSI Underbanked Forum this month. Although no longer with the CFPB, his dynamic presentation challenged banks to do more and do better at serving consumers who don’t find traditional bank products relevant. He brought out the issue of consumer trust, stating “It is very hard to change consumer behavior if people don’t trust you.” Pointing out that some of the innovations in banking, such as overdraft fees have placed the industry further in a trust deficit, concluding that “you cannot win if your customer is systematically losing.”
His talk turned positive, as new innovations and technology could change the equation in favor of consumers. Date called out payday lending or deposit advance loans as an area where better data and analytics could reduce risk and pricing to consumers. “It’s a real thing, and it’s a real need, and it is pretty inefficiently provided today,” he said. It is worth noting that other presenters from CashAmerica, SaveUp, and piggymojo shared new approaches they have taken to reduce risk in the cash advance business. There were three distinct positions that came out during the show: Payday lenders provide a valuable service: payday loans are necessary but should only be provided through nationally regulated banks; and all forms of payday loans must be illegal. For banks though, he said, “inaction is, in my opinion, inexcusable”. As if to force a response to his comments, several regulators have announced new rules in the past week that are pushing majors banks out of deposit advance loans.
Brett King, the harbinger of bank change, challenged banks to consider their relevance to the underbanked market. “Why is it that individuals who have good credit ratings, with a college degree—professional—are choosing to get a prepaid debit card instead of a traditional banking account?”, he asked. The answer he explained is that they want the utility of banking, but simpler and without the need to jump through hoops to become a bank customer. “The real shift is the changing nature of your bank account, the connection to your money.” Many consumers are finding that traditional banking products don’t meet their needs and banks are failing to introduce more relevant products. Finally, “If you want financial inclusion, you’ve got to build the right tools for these kids to engage.”
Many of these tools will be based on mobile platforms. Carrying forward the theme of the Mobile Banking and Commerce Conference earlier that week, there was little doubt that mobile has moved from alternative channel to center stage. Underbanked consumers are substantially more likely to carry a smart phone than the general population, partially due to the large number of Millennials and partially as a substitute for desktop computers. As a result, there is a considerable focus on solutions to improve mobile banking. Mitek Systems, known for remote deposit capture, has launched a solution for capturing ID cards through mobile devices, reducing the risk of KYC fraud in the channel. Scanning credit cards for card not present transactions is an innovation from Jumio to reduce fraud. Their ID scanning solution adds the benefit of extracting the signature from an ID. For example, a mobile DDA opening app could confirm the identity and store the signature for future matching. Zoot Enterprises discussed how integrating their instant prescreen and cross-sell capabilities into mobile apps can increase profitability in this critical channel.
Solutions for delivering alternative financial services (AFS) through existing bank infrastructure were also featured. One offering of note was by Nexxo Financial Corporation. In additional to standalone kiosks, they designed their AFS to be accessible through branch, call center, and now mobile. Products like check cashing, check to card, money transfers, bill pay, and money orders can even be offered through many existing ATMs by integrating Nexxo software into the existing platform. In short, banks seeking to offer the alternative products desired by the underbanked market can now create a comprehensive offering with minimal effort.
One presentation challenged the typical stereotypes of underbanked consumers as fitting neatly into buckets of young, low income, and recent immigrant. Stephen Drees, Acxiom Global Consulting, shared a range of statistics that revealed the diversity and complexity of this market. For example, while ethnically diverse, 56% are white. Only 17% are naturalized or non citizens. Half the market is over 45 years old and 20% are over 65. Gen Y accounts for less than a third, although a higher percentage of Gen Y avoid banks. More than half have some college education and 22% have college degrees. While they are more likely to be renters than the general population (50% vs. 27%), nearly half of underbanked consumers are home owners. Their home values are lower, but nearly 20% have a net worth of $100,000 or more. In other words, the group is far more diverse than the stereotypes would imply.
The real take away from the show is that banks that focus on their customers’ financial experience, rather than traditional bank products will likely come out ahead. This accounts for the dramatic growth in prepaid cards as a checking account alternative. Ben Knelman, founder and CEO of Juntos Finanzas, shared “It isn’t providing more information that changes peoples behavior (like offering mobile web or SMS messages), but changing their experience. If they feel positively about their experience, they will change behavior.” He gave an example of how Christmas savings accounts reduce stress and creates a positive emotional experience.
Gregory Morishie, VP Digital Channels Group at Wells Fargo, noted that personal financial management (PFM) is consistent with their vision and values-enabling financial success for their customers. Adam Erlebacher, VP operations at SIMPLE, framed the goal well, “At SIMPLE we give a ‘safe to spend’ amount instead of balance—subtracting all pending amounts.” By helping the consumer manage their finances in real time, SIMPLE helps consumers avoid overdraft fees. Consumers are finding alternative products that meet their financial needs. Many banks are adapting to the changing market and Gen Y preferences, but not all. Raj Date concluded, “sitting around and doing nothing …doesn’t make sense.”