Part One: Who Are the Unbanked and Underbanked?

Picture this: you’re the head of marketing at a nationally renowned financial institution. Your board is looking for rapid growth and has asked for your recommendations. After weeks of preparation, you announce that the company’s best bet is to start marketing to the poorest of the poor.  You go on to explain the ongoing crisis of the unbanked and underbanked consumers across the country who struggle to gain access to basic financial services, relying instead on predatory alternatives.

They’re shocked!

But as a marketing executive whose financially-oriented counterparts routinely struggle to take “strategy” and “intuition” seriously, you’ve come prepared. Your next slide contains hard facts and figures, not the least of which shows the steady growth in this $78 billion U.S. market.  You acknowledge that on the surface it seems completely counterintuitive– your most profitable customers have traditionally been wealthy and you’ve invested for years to become a “premium” financial brand.  

But your market analysis demonstrates how premium brands like American Express and even stalwarts like the United States Postal Service are rapidly attacking this market because it is truly the last great white space in financial services.

The board has completely changed its tune, and gives you a standing ovation.

*End dream sequence*

The above may sound far-fetched, but it’s already happening across the nation. Smart financial marketing professionals are increasingly realizing their companies can thrive by targeting customers not addressed by traditional models. It’s classic disruptive innovation, in the style of many Silicon Valley companies like Uber or eBay who became major players by finding customers that other competitors have neglected.

To help illustrate this point, we’re going to embark on a series over the next five weeks examining a market that we believe is hugely underserved. We believe providing financial services for unbanked and underbanked individuals is a market prime for new ideas and new approaches, with an underserved customer base who needs new thinking. And it’s a prime way to drive major revenue growth while doing good.

Read on to find about more about the problems customers in this market are facing and potential opportunities your business could find in solving them.

Let’s get started by answering the fundamental question: Who are the unbanked and underbanked?

The Washington, DC region has many statistics to be proud of: it routinely has the highest per capita income in the country, its population is expanding and diverse and it attracts millions of tourists annually.

But there’s a flip side: it also has the nation’s second-highest number of people without a bank account, with 35.9% of DC residents unbanked or underbanked, behind only Mississippi. We’ll explain the distinction in a minute.

Even within fast-growing regions like the Washington area, access to a bank— a fundamental aspect of daily life for millions of Americans— can be a challenge. This points to the reality for an estimated 9 million unbanked and 21 million underbanked families across the country, who must rely on so-called “alternative financial services,” or AFS, to handle money in their daily lives.

And though AFS may sound like a benign acronym, the reality can often be anything but.

Lower-income, rural or immigrant communities must often turn to alternatives such as payday loans, auto title loans and cash checking services which sometimes charge exorbitant fees, levy punitive interest or engage in predatory tactics that can leave customers in even deeper debt.

The financial cost of using these services works out to an average loss of $2500 per family each year just to access their own money or take out a loan, according to the FDIC.

Though their challenges are similar, these two groups are actually distinct: the unbanked comprise a smaller proportion of the US population (around 7-8% of American households) while the underbanked make up a larger proportion (an estimated 20% of American families.)

We’ll explore these two groups below, but for the purposes of the series, we’ll use the term “unbanked” to refer to the more than 28% of Americans who have no or limited access to the mainstream financial system.

The unbanked

According to the most recent FDIC data, unbanked households follow a dispiriting trend seen across many economic indicators in the US: they are largely lower-income, minority, unemployed or young.
Unbanked households are far from a monolithic group. The percentage of unbanked Hispanic households, for example, actually decreased from 2011 to 2013. But even that bright spot can be a slippery slope— about 45% of currently unbanked households once had a bank account.

What is common amongst most unbanked households, however, are a few key features: the majority say they don’t have enough funds to meet minimum balance requirements in a bank account, one in three say they don’t feel comfortable with or trust banks and nearly one in three say that high account fees at mainstream banks are one of the reasons they can’t afford an account.

But that doesn’t mean that they don’t want an account. According to the FDIC, 48% of unbanked families who previously had a bank account are aiming to reestablish it, and 25% of unbanked families who never had an account are also planning to open one.
Later in the series, we’ll explore research that looks at the psychological dimension of unbanked customers, including why they steer clear of the mainstream financial system.

The underbanked

Approximately 20% of American families are underbanked, according to the FDIC, meaning that they have access to a bank account but still rely on alternative services to make ends meet.

Despite having an account, many underbanked households rely on these alternatives to supplement their accounts— the most popular include payday loans, prepaid debit cards and check cashing services. Underbanked families are often sending remittance payments back to family overseas or in other regions of the country, according to a report from the Center for Financial Services Innovation.

Though the unbanked and underbanked often occupy different economic realms, the fact remains that the banking industry could do more to reach and engage these customers by meeting their specific needs.

One big challenge for banks looking to reach unbanked and underbanked customers is a simple fact of geography.

Next week, we will look at one of the reasons that stops more customers from accessing a bank: they can’t get to one. What do they turn to instead?

Read more next week on banking deserts and the alternatives customers take when they can’t find a bank.

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