There are lessons for All Financial Institutions in the
Wells Fargo Case
Part Three- Turning
Our Eyes to a Glaring Need
We have talked about the Wells Fargo case involved
violations of Unfair, Deceptive Acts or Practices Act. We noted that this is true because the
practices of the bank forced extra accounts and products on customers who
simply didn’t want them. In addition to
unwanted accounts were significant fees and charges. In some cases, there were as many as 10
unwanted accounts for customers of Wells Fargo.
While this case continues to wind its way through various
administrative hearings, news stories and the inevitable civil lawsuits, there
is a strong irony in this case that can easily go unnoticed. There can be no doubt that customers of the
Wells Fargo were victimized by an abusive campaign. However, while these customers can be
considered OVERBANKED there are simultaneously millions of Americans are
unbanked and underbanked.
A Forgotten
Population
Wells and many other financial institutions continue to
pursue practices that forced additional accounts on people who already had a
banking relationship. In the meantime,
there are millions of potential customers who have no relationship at all as
the FDIC showed inn their 2015 study of Unbanked and underbanked populations.
The FDIC has defined Unbanked and underbanked as follows:
“…… many households—referred to in this report as
“unbanked”—do not have an account at an insured institution. Additional
households have an account, but have also obtained financial services and
products from non-bank, alternative financial services (AFS) providers in the
prior 12 months. These households are referred to here as “underbanked.”[1]
Per the Corporation for Enterprise Development, there are
millions of unbanked and underbanked households across the country. For example, in 2010 the same organization
estimated that 20% of the households in New Jersey are underbanked.[2]. The number of unbanked and underbanked
people that live within the service areas of financial institutions presents
both an opportunity and a level of risk.
As the FDIC pointed out in there May 2016 study “Bank Efforts to serve underbanked and unbanked Communities” the
whole banking community is better served when the level of trust and
participation is increased[3].
Why Unbanked and
Underbanked?
The FDIC asks the same sorts of questions every year the
answers have been consistent. Here are
some of the key observations:
·
The most commonly cited reason was “Do not have enough
money to keep in an account.” An estimated 57.4 percent of unbanked households
cited this as a reason and 37.8 percent cited it as the main reason.
·
Other commonly cited reasons were “Avoiding a
bank gives more privacy,” “Don’t trust banks,” “Bank account fees are too
high,” and “Bank account fees are unpredictable.
·
Perceptions of Banks’ Interest The 2015 survey
included a new question asked of all households: “How interested are banks in
serving households like yours?”
·
The
survey results revealed pronounced differences across households.
·
Approximately 16 percent thought that banks were
“not at all interested” in serving households like theirs, and the perceptions
of the remaining 8 percent were unknown.
·
Unbanked households were substantially less likely
than underbanked or fully banked households to perceive that banks were
interested in serving households like theirs. More than half (55.8 percent)
thought that banks were not at all interested, compared to roughly 17 percent
of underbanked households and 12 percent of fully banked households.
While financial institutions are overbanking the customers they have, there are well over 50 million
households in America that currently either don’t have a relationship with a
bank or a minimal one.
Why serve these
communities?
In many cases, misperceptions from the point of view of
customers and financial institutions keep them apart. For far too long it has been an axiom that
the costs of providing banking services for consumer accounts prevents an
acceptable rate of return. However,
through the development and use of new technologies, the costs associated with
consumer accounts has significantly declined.
Without significant competition for the unbanked and
underbanked households, financial needs are met by business that are
predatory. The number of financial
institutions offering high cost loans has proliferated and the number of
unbanked and underbanked families has grown.
Advances in technology had made it possible for financial
institutions to offer services to communities throughout the country and the
world without needed to expand the branch system. Today’s digital wallet
customer is tomorrow’s commercial loan.
Compliance as an
Asset
For the financial institution that considers offering new
products and services using technology, a new approach to compliance must be
pursued. Currently for most financial
institutions, compliance is viewed as a necessary evil expense that is at best,
the cost of doing business. However,
suppose the role and function of the compliance department changed. When the compliance department becomes fully
versed in the requirements for offering Fintech products, the institution can
become an active participant in the burgeoning market. By putting resources into your institutions
ability to assess and monitor risks, new products, partnerships and growth is
possible. Start thinking of compliance
as an asset- it can be the gateway to new sources of income
Towards New Markets
The fact is that there are products that are available and
cost effective while the market for these products is huge; there simply must
be a willing spirit. Rather than committing
fraud, consider serving the unbanked and underbanked markets
[1]
FDIC survey of unbanked and underbanked households
[3]The
FDIC recognizes that public confidence in the banking system is strengthened
when banks effectively serve the broadest possible set of consumers.
Accordingly, the agency is committed to helping increase the participation of
unbanked and underbanked consumers in the banking system.
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