Retail Banking’s Canary in the Mine:
Marketing to the Underbanked Customer

Research Identifies Perils in Flight of
Underbanked Consumers to Bank Competitiors

Boston, MA. – December 3, 2009 — As underbanked consumers sever their relationships with the retail banking industry, bankers find themselves increasingly shut out of a dialogue with working class, young and emerging consumers. This flight from banking is occurring principally for two reasons: Economically dislocated consumers feel they cannot afford an overdraft-prone checking account and more vendors are creating fairly priced non-bank-centric products that are conveniently sold by major retailers.

In short, consumers want to leave banks and non-bank competitors are making it easy.

For bankers, this is immensely troubling because the further disintermediation of middle-class/blue-collar workers undermines the rationale for extensive branch/ATM networks and seriously compromises the Profit/Loss calculations for core banking services like call centers and IVRs.

For retail bankers, the challenge of acquiring, profitably growing and retaining the underbanked and underserved and the $15 billion that group spends on alternative financial services products is almost Herculean. And embitteringly for bankers and their industry’s stakeholders, much of that challenge has been created by bankers themselves.

Incubating consumer curiosity (and receptivity) to explore and purchase non-traditional financial services products from non-bank providers are:

A branch banking culture many working class Americans find off-putting.

An overdraft/NSF fee engine singularly responsible for churning out the profits of the retail banking industry.

Paycheck deposit clearing times that can be unmanageable for the 70% of U.S. households living paycheck-to-paycheck.

The most troubling aspect of this disintermediation is that economic recovery with its fuller employment will not automatically correlate with reclaiming banking relationships. In the past five years, non-traditional products sold to unbanked/underbanked consumers have mainstreamed sufficiently that leaving a bank, and the banking industry, may no longer seem like an admission of failure – rather, it may seem like taking the first step toward financial success.

A new report from Mercator Advisory Group’s Customer Centric Delivery Channel Practice Retail Banking’s Canary in the Mine: Marketing to the Underbanked Customer offers an in depth examination of the challenges and opportunities found in targeting these newly unbanked/underbanked consumers.

It is Mercator Advisory Group’s position that banks can retain or regain these banking relationships if they stop defending overdraft fee income and rigorously focus on constructing transparent opt-in value-added fees, driving out operational inefficiencies through strategic partnerships and aggressively pursuing the distribution of innovative products and services through emerging channels.

“While there are well-documented challenges to profitably selling to/retaining underbanked consumers, a deep recession disintermediates solidly banked customers who may never return,” comments Elizabeth Rowe, Director of Mercator Advisory Group’s Retail Banking Advisory Service and author of the report.Payroll cards are a gateway product leading to the purchase and use of non-bank prepaid cards, bill payments, credit services, etc. In previous recessions, consumers were forced to remain with their banks or to return to them when their household finances improved. Today’s consumers can easily and rationally choose to stay outside banking and to use the safe, reasonably priced financial services products marketed by major retailers. This is a chilling possibility for the banking industry.”

Report Highlights Include:

While $38 billion in overdraft fees were rolling into banks and credit unions, those institutions failed to finance, staff and prioritize the strategic planning and forensic analysis necessary to develop and implement an array of value-added products and services customers were willing to purchase.

Without co-opetition between banks and financial services centers (FSCs), those who have been, and those who are becoming unbanked, may well find themselves dropping into a shadow economy not experienced in the U.S. in over fifty years. That is unless they can get to a Wal-Mart.

As customers leave banking relationships they can no longer afford and check cashers/payday lenders are forced out of business, Wal-Mart and other multi-national retailers will become some of the largest providers of retail banking products and services.

Non-traditional products sold to unbanked / underbanked consumers have mainstreamed sufficiently that leaving a bank, and the banking industry, may no longer seem like an admission of failure ??? rather, it may represent taking the first step toward financial success.

As retailers grow the breadth of their financial services offerings through their third-party relationships, we may well see the creation of a two tier banking structure with banks and credit unions competing against the most heavily trafficked and profitable retailers in America. Unless banks quickly spin on their heels to address their revenue models in the post-overdraft world, consumers’ next bank may have a big yellow smiley face focused on rolling-back prices.

One of the 7 Exhibits included in this report:

This report contains 28 pages and 7 exhibits

Companies Mentioned in This Report: BBVA Compass, Cardtronics, Chex Systems, Community Financial Services Association of America (CFSA), FDIC, Fifth Third, Financial Service Centers of America, Fiserv, Inter-American Development Bank, IPP, JPMorgan Chase, KeyBank, Kroger, Moneygram, North Side Community Federal Credit Union, Progreso Financiero, Safeway, TIO Networks, Union Bank of California, Wal-Mart, Washington Mutual, Wells Fargo, Western Union and The World Bank.

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Mercator Advisory Group
is the leading, independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver pragmatic and timely research and advice designed to help our clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world’s largest payment issuers, acquirers, processors, and associations to leading technology providers.