Reach Out To Underbanked Communities

The low-income demographic is traditionally viewed as a risky target group, but some credit unions think poor neighborhoods have great potential.


They need debt relief, they need payday loans, they need affordable interest rates and they are not awash in money. But these “underserved” or “under banked” communities are providing opportunities for credit unions like Stepping Stones Federal Credit Union to thrive in a needy area.

Stepping Stones, based in Wilmington, DE, received its charter last month to open in the city of about 72,000. The new credit union is targeting lower income residents and it expects to see a rush of new members during its soft opening later this month, says the credit union’s founder, Rasmi Rangan. Stepping Stones’ official opening is planned for the end of the year.

“This is an area that needs hand-holding,” Rangan said of the region and the strong demand for financial advising and debt relief help there. “Obviously, everyone has already written them off: ‘They are a poor community. They are a community that does not know how to manage money.’ We believe that thought is counterintuitive. There is opportunity here.”

Underbanked households are those that have may have a checking or savings account, but rely heavily on alternative financial services such as payday lenders. They often use non-bank money orders, non-bank check cashing services, rent-to-own policies or even pawn shops for money or investing because they view those services as more convenient. Nearly 25.6% of U.S. households, or about 60 million adults, do not have a bank or are underbanked, with  according to a 2009 FDIC-sponsored supplement to the U.S. Census Bureau’s monthly population survey.

Credit unions may shy away from entering new markets, especially underserved ones such as immigrant communities, disabled populations, minority neighborhoods or rural areas. Co-ops may fear financial risk, reputational damage, compliance problems or they may simply be doubtful in their ability to serve a community they don’t understand, says Warren Coopera, CEO of Coopera Consulting, which helps the Iowa Credit Union League serve Hispanic communities.

“There is a lot of concern about credit unions tapping into a new community,” Coopera says. “But it’s really a perception issue. When it’s done right, you can overcome these risks.”

Credit unions that have successfully entered underserved markets have pushed past serving them out of a sense of duty, and have moved on to depending on those communities to grow. They have “aligned their behaviors differently” as a result, Coopera says, as they act more like organizations that expect to grow instead of organizations driven by charity.

Credit unions that are successfully finding opportunity in underserved markets are showing more willingness to adapt to the market instead of waiting for the market to adapt to them, Coopera says, basing his conclusion on the consulting firm’s analysis of 45 credit unions that have entered an underserved market.

Credit unions should look at their personnel, processes, products and promotions and marketing to see whether they are creating barriers to the underserved population. For example, credit unions in Hispanic neighborhoods may find they have not been providing proper underwriting information in Spanish.

“Doing what you can to listen and learn from that community is at the core of what it takes to serve this market well,” Coopera says.

Unbanked regions of the United States:

Click on graph for larger image  |  Source: FDIC's 2009 report