Who are the Unbanked and Underbanked?
And Why should a Community Bank Care?
Every year, as part of the strategic planning process,
financial institutions consider the best ways to expand customers bases. One area that should be considered is
addressing the large numbers of unbanked and underbanked families spread
throughout the country. The unbanked
and underbanked are defined as households that have either no (unbanked) or
minimal (underbanked) banking products.
When one considers who the unbanked and
underbanked are, at first blush it may seem that these are people who might not
be a good for financial institutions.
But nothing could be further from the truth. This group of families
represents an important opportunity for expansion and growth in the financial
services industry. In fact, this group
is so important that the FDIC conducts a study on these household
bi-annually.
Unbanked and Underbanked Defined
The unbanked have no ties to an insured
economic institution. Essentially, they have no checking or savings account and
no debit or ATM card. Meanwhile, the underbanked
do use some of these services – often a checking account – but they
also used alternative financial options within the past year. This population has been estimated to be as
many as 30 million people.
Around 20 percent of Americans are underbanked, according to
the FDIC, which means they have either a checking or savings account, though
rarely both. Households are also usually given the underbanked distinction if
they've used alternative financing options during the previous year, such as
money orders or rent-to-own services. Around 67 million Americans are
underbanked, or the equivalent of 24.5 million households, based on 2015
figures from the most up to date FDIC survey.[1]
Just as important as the number of people who are unbanked
and underbanked are the reasons that they have limited contact with banks. The most recent FDIC study on the unbanked
and underbanked was published in 2017.
In the study, the main reasons for not having bank accounts included:
• “Do
not have enough money to keep in an account”.
• “Don’t
trust banks”
• “Bank account fees are too high”
• “Bank account fees are unpredictable”
• Higher
proportions of unbanked households that were not at all likely or not very
likely to open a bank account in the next 12 months cited “Don’t trust banks”
(36.2 and 31.5 percent, respectively) in 2017, compared with unbanked
households that were somewhat likely or very likely to open a bank account in
the next 12 months (24.7 and 21.0 percent, respectively).[2]
As far as demographics are concerned, millennials are among
the most likely to be underbanked, with 31 percent of them under the age of 24,
according to federal figures. This is the population that has driven the growth
of Fintech and other alternate banking services, such as money service business.
The thing is that just because these household have limited
banking accounts doesn’t mean that they don’t need banking services. For example, Remittances are a growing
market that continues to grow according to the world bank statistics
$138,165,000,000 in remittances was sent from United States to other countries
in 2016. In 2018, the market is expected to grow more than in the
previous two years for several reasons. The average size of an
individual remittance remains $200.00, leaving open the potential for large fee
income.
Fintech companies have developed many products that allow
customers to have many of the same services and abilities as a bank
account. Digital wallets for example,
allow customers to receive payroll, reload debit cards, payment bills and
purchase gift cards among other things.
These platforms also allow customers to send wires, ACH’s or other
transfers without using a bank. As a
result, more and more underbanked people are conducting their banking business
on the smart phone. Speed of delivery
and the ability to tailor products and services is a key component to success. The products and services that financial
institutions must offer to stay relevant are also changing.
Another area for development is micro lending. This
is a product that is designed to let a customer grow into a full-fledged
profitable relationship. A small dollar loan with reasonable terms
allows the bank to report favorable information to credit reporting
agencies. It further allows the bank to reach to communities that
have been traditionally under banked.
Though micro lending has been very popular in several
foreign countries, the industry is fairly new in the United States.
Micro businesses are defined as “a business with five or fewer employees that
requires no more than $35,000 in start-up capital.” [3]
There is a surprisingly large number of businesses in the United States that
meet this definition. In 2011, there were approximately 26 million
micro businesses. [4]
Each of these businesses represents a group of people that working towards
self-sufficiency, greater wealth and ultimately, the potential to be
significant customers at commercial banks.
In the United States, the Small Business Administration defines
a microloan as one at or below $50,000. Data as of 2012 showed that the
average loan for a microenterprise was $14,000. [7] Currently
there are several sources for obtaining microloans, including nonprofit
organizations, community development financial institutions and private equity
funds
A formal micro lending program would be the ultimate in
innovation. Such a program would greatly enhance the reputation of a bank
within its community. It is worth nothing that micro lending
programs have been very profitable both internationally and in the United
States.
The FFIEC’s proposed Interagency Questions and
Answers Regarding Community Reinvestment make it clear that the
focus in the future will be on innovation in lending and creativity in delivering
banking services. Credit will be given to lenders for innovation in
lending. [8]
Embracing Credit Needs
For banks, embracing the concept of determining and meeting
the credit needs of the community can yield very positive results. The list of
factors that make up the consideration of credit needs from the Federal Reserve
Bank of Atlanta’s publication “Community Reinvestment – Does Your Bank Measure
Up?” includes the following;
- The makeup of the
community;
- What the local and
regional economic conditions are;
- What kind of
opportunities exist for serving the community through lending and
investments;
- What your banks
business strategy and products are; how is your bank doing financially;
- What your bank sees as
the credit needs of the community; and
- What individuals,
community and civic organizations, and business-as well as state, local,
and tribal government-think about your banks efforts toward meeting the
community credit needs.
The FFIEC’s proposed Interagency Questions and
Answers Regarding Community Reinvestment make it clear that the
focus in the future will be on innovation in lending and creativity in delivering
banking services. Credit will be given to lenders for innovation in
lending.[5]
If your institution is considering developing such a
program, it is an excellent idea to get the input of your
regulator. By collaborating, you have the benefit of strengthening
your relationship with your regulator, working through any troubles with the
program and getting the “halo” effect of developing the program in the first
place.
The unbaked and the underbanked continue to create
opportunities for community banks that are innovative.
[2] FDIC
National Survey of Unbanked and Underbanked Households
[3] Elaine
L. Edgcomb and Joyce A. Klein, “Opening Opportunities, Building Ownership:
Fulfilling the Promise of Microenterprises in the United States,” FIELD,
February 2005, http://www.fieldus.org/ publications/FulfillingthePromise.pdf.
[5] Community
Reinvestment Act; Interagency Questions and Answers Regarding Community
Reinvestment; Notice September 3, 2014
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