CFSI Takes a Good Look at the Unbanked and Underbanked Markets

This is the first of several posts about innovation in the financial services market. Today's post was written by Madeleine Bennett.

Last week, an unusual sort of banking conference took place in Los Angeles: the EMERGE CFSI conference, presented by the Center for Financial Services Innovation (CFSI) and American Banker. The conference provides those who do business with the unbanked and underbanked populations of America with a venue to meet, to exchange ideas, and to attend panels addressing the needs, challenges, and opportunities of this largely untapped market. The forum has attracted a range of people involved in this market, including investors, retailers, executives, and consumer advocates.

As defined by the FDIC, "unbanked" refers to households with no checking or savings account, and "underbanked" to those with one of those types of account but who mostly use alternative financial services, (AFS) such as payroll cards, non-bank check cashing, and pawn shops to manage their finances.

The title "EMERGE," adopted at last year's forum, reflects CFSI's view that the term "underbanked" "no longer adequately reflects the scope and dynamics of this market." As CFSI explains on the event Web site, this is a rapidly expanding and diversifying market. Traditional banking services per se are no longer the sole concern of the financially underserved market. The forum site highlights the urgency of the need that exists for financial services tailored to the underserved.

Up to 28% of the American population is either unbanked or underbanked, according to the Batten Institute at the University of Virginia. In a recent blog post on Forbes, the institute's Gosia Glinska describes the disturbing trend of service vendors that target the underbanked charging exorbitant rates for their services. This practice essentially keeps poor customers poor by sending them into never-ending cycles of debt and borrowing. The article estimates that the average underbanked family spends around 10% of total household income on fees and interest charged by these predatory institutions.

The time is ripe for change. According to a 2012 CFSI market-sizing study, the underbanked market is growing by 8% annually, and larger banking institutions are beginning to take notice, as several recent announcements show.

In April of this year, the FDIC released a white paper on the potential of mobile financial services, (MFS) to impact the lives of the underbanked. They concluded that mobile banking could be an important tool in the maintenance of customer-bank relationships, but that the relevant technology was not well established in the marketplace. Still, mobile banking is a crucial component of the global microfinance market, used by such international pioneers as Grameen Bank. MFS has already proved itself in many a foreign market and may yet make it in the U.S. Some American companies, however, are already approaching the market from a different angle.
On May 29, JPMorgan Chase and Co. announced their partnership with CFSI on the Financial Solutions Lab, a $30 million project with a five-year plan for holding competitions in which social entrepreneurs "build products and services that will help consumers with their financial health." The project will focus on behavioral insights that will help consumers overcome the obstacles to better financial behavior and health.

On June 3, the day before this year’s EMERGE forum began, Visa announced a new prepaid designation, applicable to cards and other services, that they developed along with CFSI and the Pew Charitable Trusts. Visa Inc. President Ryan McInerey explained Visa's motivation: "We felt it was important to go beyond current marketplace regulatory requirements and bring transparency to this growing product area so that consumers better understand the fees, protections and benefits associated with cards." The new designation entails a host of features to ensure consumer protections as well as fee simplification and disclosures.

This year’s EMERGE conference has had an impact on some already, such as the reporters who were taken into low-income neighborhoods to participate in the same kind of transactions the underbanked do as a matter of course. Ronald Brownstein, in his article for The Atlantic described the discrepancy between the way his group was guided through high-fee AFS transactions and the total lack of information about financial health or security they were provided along the way as "like looking through a one-way glass." Too often, unbanked and underbanked customers lack critical information about fees, choices, and useful habits. In the future, through innovative products and perhaps new mobile apps, that one-way glass has the potential to become much more transparent.