Serving Unbanked and Underbanked Households
Part 1: Understanding the Market
Banks, credit unions, retailers, payday loan companies, and even the U.S. Postal service have shown interest and have made efforts to serve unbanked and underbanked households in the United States. It seems that most financial institutions want a piece of the pie; however, some companies have been more successful than others with this market segment. But, why?
Well, it is likely that those successful companies have a better understanding of this market segment, including its opportunities and risks. This is the first article in a three-part series examining this growing market. It provides an overview of this market and what it means to be unbanked and underbanked in the United States.
The FDIC conducts a biennial survey of households to estimate the proportion of households that do not fully participate in the banking system. In 2012, the FDIC issued a report with the results of its 2011 survey. In that report, the FDIC determined that households were identified as “Unbanked” if no member of a household had a checking or savings account. Most unbanked households use Alternative Financial Services (“AFS”) or cash to meet their financial needs. “Underbanked” households were defined as those households that have a checking and/or a savings account and had used AFS or cash instead of relying on similar products offered by financial institutions. AFS products include non-bank money orders, non-bank check cashing services, non-bank remittances, payday loans, rent-to-own services, pawn shops, or refund anticipation loans.
Unbanked and underbanked households, however, are not homogeneous populations. They vary depending on their demographics, past banking experience, personal circumstances and future financial prospects. Foreign-born non-citizens, Hispanics, African Americans, households experiencing unemployment, and lower income households show the highest percentage of unbanked and underbanked households. The main reasons these groups do not have bank products include lack of understanding of the financial system, distrust, lack of sufficient funds to open an account, or because they think they do not need one.
The FDIC found that in 2011, roughly 8% of U.S. households were unbanked. This means that approximately 17 million adults lived in unbanked households. The unberbanked represented about 20% of U.S. households. This represents approximately 24 million households with about 51 million adults.
Furthermore, about one quarter of households have used AFS in recent years, a large number of those from unbanked and underbanked households. AFS transaction products, such as non-bank money orders, non-bank check cashing, and non-bank remittances, are more widely used than AFS products, such as payday loans, pawn shops, rent-to-own stores, and refund anticipation loans. Overall, unbanked households utilize AFS more often than underbanked households.
Both types of households value the convenience of AFS transactions and the ease with which they can obtain AFS products. The most common reason for using AFS instead of using financial services from banks or credit unions, include (1) a lack of understanding of financial products as they have only been exposed to AFS, (2) a perception that banks do not offer those services, or that they are more expensive, and (3) the accessibility to AFS products and the speed to obtain credit from AFS providers, among others.
The FDIC suggests that, to improve their relationship with the unbanked and underbanked market and create better access to financial products, financial institutions should be aware of the following:
• Location, location, location. Financial institutions will have more effective and efficient strategies to market the unbanked an underbanked by understanding the different segments of their local markets.
• The checking account myth. Opening a bank account for this population does not guarantee long term success.
• Banking experience matters. Households with some banking experience and financial literacy put more trust on banks and credit unions, and rely less on AFS and prepaid debit cards.