Perhaps the most perplexing question facing bankers who desire to serve the underbanked consumers is what products would actually meet their needs. Fortunately, research on this topic is already being done and it has been proved that mainstream banks can successfully and profitably offer appealing products to this valuable market. The only significant barrier is understanding the core value underserved consumers are looking for and how to design the products in a way that will mitigate risk and maintain profitability.
The primary distinction between mainstream banked consumers and those consumers who choose to manage their financial life through non-bank entities is the need for immediate access to cash. Whether visiting a payday lender or cashing a check at 7/11, alternative financial service providers allow consumers to exchange their check or commitment for immediate cash. In exchange for this service, this market segment is willing to pay significant fees for the convenience they receive. It’s interesting to note that there are times when mainstream consumers would also gladly pay a fee for this added convenience, if they knew the service was available from a trusted source.
The account structure for underbanked is similar to that used by mainstream clients, albeit more focused on immediate access. Rather than a traditional DDA account where funds are placed on hold while checks clear, a general-purpose reloadable prepaid card provides the core account upon which the relationship is built. This eliminates the need to provide a separate debit card for ATM, Internet and in-store purchases.
Adding funds to their card is likely to occur in three primary forms. Cash can be loaded to the card in the branch or potentially through an ATM interface. Check cashing with immediate access to funds can be provided in branch for a fee. The fee will cover the cost of check guarantee services that will absorb the risk of any checks that fail to clear. Checks from government, local businesses, or those drawn on the same bank can be cashed for a lower fee. Finally, direct deposit can provide a consistent and ongoing stream of deposits to the account.
Money orders and international remittances are commonly requested products. Again, relying on major providers, it is easy to implement these services. An added benefit is that other bank customers will appreciate their ability to more easily access the services at a lower fee. Walk-in bill payment is another desirable service that can be implemented through vendor partnerships. Combining these transaction services together will meet most of the transaction needs of underserved consumers. As consumers utilize these alternative products through the bank, they will, with time and education, be able to utilize additional products such as savings accounts.
The ability to manage these services not only in branch, but through mobile and online devices, is critical to meeting the needs of the market. In the same sense that underserved consumers are looking for immediate access to their cash, they are also looking for immediate information on the status of their funds.
The last step in fully embracing this market segment is to recognize the need for short- and long-term small-value loans. The strategy for managing these loans is significantly different than most bank lending programs. However, they can be done profitably and fairly. While bringing this business into the branch is an important step in the process, great care should be taken. Many banks have marketed to the underbanked without offering products designed for those without credit history. More than a few institutions have lost millions before realizing how to manage the risks associated with lending to new market segments.
There are underserved consumers in every community. Like Regions, I encourage you to consider if you could be serving a significant additional segment of your population. It may be easier to meet the needs of this market than you realize. Over time, these same consumers are likely to reward your confidence in them with trust in your institution.