Underserved consumers in the U.S. — representing about 68 million adults — represent a significant source of unmet demand and growth potential for credit unions seeking to expand membership and services in their local communities. Many of these consumers, even if they have a checking and savings account, frequently rely on alternative financial services (AFS) providers for transaction and credit products such as payday loans, check cashing, money orders, and remittances.
The size of the problem is much larger than most people realize, as 42% of all US households used some type of AFS in 2012. The cumulative cost of these services to underserved consumers is drastically higher than if the same services were provided by a credit union instead. Certain loans from pawnshops, for example, can have interest rates in excess of 25%.
As a result of a long-term reliance on AFS, underserved customers — those who have the greatest need for affordable financial products — continue paying excessive fees for products they could otherwise get for much less (sometimes for free). More importantly, the use of such products prevents these borrowers from building up a credit history that could be used to secure more important financing in the future, such as an auto or home loan.
This problem has been compounded during the recent financial crisis as many financial institutions have closed branches or gone out of business in areas of the country where they are needed most. In 2012 alone, 1,118 financial institution branches closed across the US, according to CNN.com.
AFS providers are filling the void left behind by expanding their operations with new locations, modeling themselves as banks to lure consumers, and deploying new technologies to better address the needs of the underserved consumer. All these factors contribute to a general lack of access to general banking services for the underserved in many parts of the country.
Mobile Banking Offers The Key
As a growing percentage of the U.S. population adopts smartphones, mobile banking has become a key solution for credit unions that want to bring financial services to underserved consumers without investing in expensive branch networks. More than half of the US population (52%) owns a smartphone and nearly a third (28%) have used mobile banking in the last year, according to the Federal Reserve Bank. Notably, smartphones are often the sole means of Internet access for the underserved. That fact, combined with the recent surge in branch closings, makes mobile banking the only way to effectively reach much of the underbanked population.
Mobile banking solutions provide smartphone users with access to financial services at the touch of their fingertips, regardless of their location. The rapid adoption of mobile banking across all demographics is a solid indication that consumers want convenience and will move to get it. They will be attracted by whatever provider — traditional or AFS — is offering the most widely deployed and easiest-to-use mobile applications.
Who Are The Underserved?
The following segments are key areas where credit unions should focus their expansion efforts.
1. Unbanked Households:
As defined in the National Survey of Unbanked and underbanked households conducted by the FDIC, Unbanked Households are those without either a checking or a savings account. A full 8.2% of US households are unbanked, representing 17 million adults. The individuals residing in these households have no affiliation with mainstream banking.
2. Underbanked Households:
The FDIC defines underbanked households as those that have a traditional checking or savings account, but also use AFS services. Every time a consumer turns to an AFS provider, credit unions miss another opportunity to reach new markets or grow deeper relationships with existing members. There are over 24 million underbanked households nationwide.
3. Younger Consumers:
Consumers age 15-34, across all income levels, have a particularly attractive profile for credit union growth. Half (55.5%) of them are underbanked and a third (37%) have never had a traditional banking relationship. They are the most technology-savvy segment and also have the highest rate of being underserved.
Most appealing to credit unions is that this group represents the greatest potential for building a long-term relationship. But with the recent boom in AFS providers and mobile applications, these consumers are continuing to slip through the fingers of mainstream banking. As they experiment with alternative ways of managing their money, they are unlikely to respond to credit union outreach efforts that are not mobile-based.
4. Consumers In Underserved Geographic Locations:
There are underserved consumers in every part of the US, but they are highly concentrated in the South. According FDIC’s 2013 Bank Failures Brief, 53% of all recent bank closures also occured in the South.
5. Lower-Income Consumers:
Almost half (47%) of households with an annual income of $30,000 or less have a traditional bank account but still rely on AFS, according to the FDIC. A quarter of them have neither a checking or savings account and rely fully on AFS.
The turning point in the race between traditional and AFS providers to capture or recapture these relationships is approaching rapidly. Credit unions need to step to the forefront of this marketplace or risk being left behind. Assisting these consumers with additional banking services is not only an important area for future credit union growth; it is a community imperative that, if unanswered, will continue to be capitalized on by AFS providers at the expense of the borrower.
You can find much more information about mobile banking in Bluepoint Solutions’ Mobile Banking Resource Center.
Included is our most recent case study "How to Reach the Underbanked with Mobile Check Deposit" and our latest trend report white paper "The Future of Mobile Banking." There are also links to some of the studies cited in this article.
Bluepoint Solutions is a financial technology software company focused on providing payments and content management solutions to credit unions. As an established leader in the credit union industry, Bluepoint offers three main product categories: check capture, item processing, and content management. As one of the few providers in the industry to offer a viable end-to-end check capture and item processing solution, we continue to develop new payments solutions for our expanding customer base.