Banks throughout the country are continually searching for new markets to serve and products to serve them. This is natural evolution: As markets become saturated, bankers either evolve the product set or search for new customers whose needs are not being met. The unbanked and underbanked have perennially fallen into the latter category for retail banks across the country and in fact, 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 Note titled Online Cash Payments: Threat or Opportunity?, which discusses this segment in more detail.)
The general definitions of the underserved used by the Federal Deposit Insurance Corporation in its 2011 Study of the Unbanked and Underbanked are as follows:
- Unbanked households are those that do not have anyone resident in the household who currently owns a checking or savings account.
- Underbanked households are those that have a checking and/or a savings account and have used nonbank money orders, nonbank check cashing services, nonbank remittances, payday loans, rent-to-own services, pawn shops, or refund anticipation loans in the past 12 months.
Some banks and nonbanks have tested and rolled out services targeted at the unbanked and underbanked segments. Unfortunately, many other banks have avoided these segments out of fear that these consumers are either too poor and unprofitable to serve or would require too much in terms of bank resources to support. The reality is that many of these prospects are good, potentially profitable consumers for whom fee-based services are the norm. Among these consumers are recent immigrants, students, or widows and widowers, all with potential life-stage financial product opportunities. These opportunities will be discussed in an upcoming Research Report from Mercator Advisory Group’s Debit Advisory Service.
In addition to the fee-based financial products (such as check-cashing services, prepaid card products, or money transfer services/P2P services), one can envision marketing selected credit products to this same potential customer base. LexisNexis conducted a study in 2012 that found 15–20% of unbanked and underbanked consumers were in fact creditworthy and would generate a prime or better risk score using alternative risk data. This credit-qualified subset of the underserved consumer base could be offered either installment or revolving loans/credit cards.
In this period of profit compression on debit cards, it is time for banks to focus on expanding their customer universe by looking for ways to serve the financially underserved.