Kill The Unbanked

It’s time to kill the Unbanked. The label, not the people.

A Knowledge@Wharton post titled A Question of Value: Bringing Banks to the Unbanked contains a number of statements that bear a closer degree of scrutiny.

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K@W: “One quarter of all Americans households are not maximizing their banks’ services — or going to a bank at all — choosing instead to use such substitutes as check cashers, payday lenders and refund anticipation loans. [T]hese 34 million households are ostensibly on the radar of banks that could gain them as customers.”

My take: First off, if “these 34 million households are on the radar of banks that could gain them as customers,” then how could they be “not maximizing their banks’ services” if they don’t do business with banks? Second, why is it assumed that a customer who uses an alternative financial service provider is “not maximizing” their bank’s services? Payday lending rates may be high, but direct deposit advances offered by banks and credit unions aren’t exactly bargains. Assuming that one’s bank could provide a service better than that offered by an alternative financial services providers is not a defensible assumption.

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K@W: “Reaching out to these unbanked or underbanked consumers may become even more complicated due to an unintended consequence of the low interest rates set by the Federal Reserve in an effort to jumpstart the U.S. economy. As a result of the Fed’s move, the story notes, banks are earning less on individual transactions, which means they will have to come up with new ways to make money. That might include raising fees for services, which in turn could lead to more consumers being priced out of doing business with traditional FIs.”

My take: Hello! Where have you been Wharton? Banks have been raising fees for services for the past three years to recoup the revenues lost to the weak economy and regulatory changes. Many consumers have already been priced out of doing business with traditional FIs. But…why is this assumed to be a negative? Who said that only a “traditional” FI could provide high-quality financial services to consumers?

This line of thinking seems to be rooted in some misguided belief that a checking account is some kind of God-given right, and that paying for the account (or at least paying more than some arbitrarily determined amount) is a violation of that right.

The EU seems to be moving in this direction. Given the financial troubles the EU is having, is this really a policy we want to emulate here in the US?

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K@W: “Although the FDIC notes that the unbanked and underbanked sector in the U.S. tends to be composed mainly of “non-Asian minorities, lower-income households, younger households or unemployed households,” this group is not a homogenous section of the population. Instead, they represent a range of races, incomes and ages “with different sets of needs and different challenges,” notes Raul Vazquez, CEO of Progress Financial, a community-based financial services company targeting Latinos.”

My take: Thank you, Mr. Vazquez — your comment is spot on. Mr. Vazquez blasts a common misconception that anyone who fits the label Unbanked or Underbanked is some kind of underprivileged consumer being taken advantage of by big evil financial institutions and alternative financial services providers.

Wrong assumption. There is a growing segment of the population called the Debanked — mainstream consumers who are highly educated, and either employed or employable (due to their current status as a college student) — who willingly, consciously, and rationally avoid doing business with a traditional FI.

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K@W: “Many people do not like banks because they are tired of being charged fees that were explained in small print that no one reads,” [Wharton professor Keith] Weigelt points out. “They feel banks rip them off.”

My take: Granted, disclosure statements could be simpler and easier to read. But one $5 fee doesn’t put someone in dire straits. The people who pay out $1000+ per year in bank fees are doing so because of some so-called hidden fee. They do so because of their own behavior. They need help that banks aren’t set up to do. An Aite Group analysis from 2009 found that about one in consumers with a bank account would be better off getting out of checking accounts and using prepaid debit cards to manage their finances. As fees have risen over the past three years, that percentage has to have grown.

The reality of the financial services industry is that for many consumers, using so-called alternative products from so-called alternative providers isn’t a bad thing — it’s a good thing.

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And, in fact, that’s exactly what Mr. Vazquez says:

“Vazquez says that in order for the unbanked to begin relationships with traditional financial institutions, it might be necessary for them to first use community based organizations and other alternative products.  “A bank is not necessarily built to meet the needs of these customers,” he notes. “With the overhead [banks] carry and the fees they impose on accounts, [the cost] might be too high for an independent banking relationship.”

My take: Mr. Vazquez is, again, spot on. But his comment hints at something I don’t hear many people talking about: That if the unbanked first use alternative providers before developing relationships with traditional FIs, then the unbanked aren’t always unbanked. In order words, for many consumers, unbankedness is a transitory phase.

What this means is that, rather than creating regulatory hurdles and constraints that force traditional FIs to serve the [temporarily] unbanked, public policy would be better served finding ways to fix the underlying factors causing the temporary unbankedness — which, in many cases, is temporary unemployment.

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K@W: “Banks are eagerly trying to attract a chunk of this “underbanked” population, but are still looking for the best way to do it. Their desire to serve this customer base may not be so much out of goodwill, Weigelt notes, as the desire for higher profits.”

My take: Banks have a desire for higher profits? Duh. That was a tough one to guess, eh? But part of the statement above makes no sense, and is indicative of the confusion surrounding the terms unbanked and underbanked. By definition, the underbanked are already doing business with banks. So banks really aren’t “looking for the best way” to attract them. They already have them. But, for whatever reasons, banks aren’t providing all the products this segment needs. Maybe it’s because they can’t provide those products profitably. If that’s the case, then banks really aren’t looking to provide those services to this consumer segment.

I don’t believe that banks can’t profitably provide those services, and have published a number of Aite Group reports over the past year trying to make the case.

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Bottom line: Consumer advocate groups, industry pundits, and other uninformed observers need to understand this: So-called alternative products are no longer alternative. And that terms like unbanked and underbanked have outlived their usefulness. 

It’s time to kill the unbanked.

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11 thoughts on “Kill The Unbanked

  1. Ask first why they are UNbanked. Could it be because the risk and reward is not worth the effort and such commercial adventures (no matter how socially appealing to some) are dead on arrival. Seems that extending huge mortgages to deadbeats who could not ever pay the mortgage back was thought of as being a great idea a few years back. Hello! Are we learning anything at all?

    • Dr. Clark: I’m a bit leery of calling all unbanked consumers “deadbeats.” Maybe some are, but others choose to be unbanked, some are temporarily unbanked, and others are systemically unbanked. What I’m hoping to do is raise the level of awareness, and get people to stop thinking that being unbanked is a crime committed by financial institutions, and that “underbanked” is simply a useless label.

  2. “Bank” and “banking” are becoming ambiguous. And underbanked, unbanked labels are meaningless is this new digital realm. There are market segments that get their “banking” needs met through new means, that are simply, “unbankerly”. And products like Bluebird will likely proliferate and will have appeal beyond so-called “dead-beats”.

  3. There are many, many people who would hardly be called deadbeats who use “alternative” products and services not because a bank or credit union won’t have them — it’s because it’s more convenient. It’s less of a hassle. I used to be surprised when I’d find out a credit union employee was using a check-cashing/loan store. Not anymore.

  4. This can be finding a much more very subjective, but I much like the Zune Marketplace. The program can be colourful, has more style, and a few great features such as ‘Mixview’ that let you rapidly discover connected pictures, tunes, or any other consumers associated with what you are hearing. Simply clicking one particular may focus on which merchandise, and another group of “neighbors” can come in to watch, allowing you to get around all around exploring by similar artists, tunes, as well as consumers. Speaking of consumers, your Zune “Social” is also great fun, allowing you to uncover other folks together with contributed preferences and becoming pals with them. Then you definitely can hear a new playlist created depending on an amalgamation of the items your pals are hearing, which is also pleasant. Those concerned with privacy will probably be allayed to find out it is possible to avoid the open public via experiencing your personal hearing practices in case you therefore choose.
    Empey

  5. Great article Ron and I agree with your point Bryan. Banking is banking. Whether you use Green Dot, Simple, PerkStreet, Bluebird, Emida CAT or Flip from PreCash. If you are depositing money somewhere and buying stuff with a card or paying bills with your card or online with an account, you are banking.

    If you are 100% cash only person and you but stuff with cash and pay bills y buying money orders. You are banking.

    Some people use a traditional FDIC insured bank. Other people use a NCUA insured Credit Union. Some people use a service that has a partner that handles the FDIC insurance. There are also people use a service that is not FDIC insured. None of this is important. As long the people are getting the services they need it is all good.

    If you are a company providing these services, make sure you know your segment and engage with them. If your primary segment(s) do not consist of the type of consumer who uses these other services (those services erroneously called alternative) then your competition is just banks and credit unions interested in the same segments. If the opposite is true then pay attention, you have even more competition.

    So in summary…what Ron said.

    • Dick: Thanks for the link to the article. I’ve got two challenges in trying to respond: 1) I only get to see a preview of the article, and 2) I’m not familiar enough with the banking environment in the UK, or the RDR.

  6. Pingback: Stop The Underbanked Confusion! | Snarketing 2.0

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