A 2020 FDIC report shows that 6% of US households were unbanked, meaning that no one in the household had a checking or savings account at a bank or credit union. This represents over 7.1 million households. Even though these have been the lowest unbanked population statistics since 2009, the recent pandemic may increase the number of unbanked Americans due to high unemployment, access to credit because of default, or decreased savings.
In addition, the federal reserve report on economic wellbeing shows that 16% of adults in the US are underbanked. These adults have a bank account but use an alternate financial service other than their bank such as payday loans, paycheck advances, pawn shops, auto-title loans, and tax refund advances.
Many of these underbanked and unbanked Americans may have a thin credit file with little or no credit history. Even with a credit history, their credit scores may be low due to defaults or high debts. This prevents them from getting a loan from a bank or credit union. They are called “sub-prime borrowers” with credit scores of 600 or below.
Serving the unbanked and underbanked
Not surprisingly, the unbanked and underbanked are also underserved. And financial inclusion presents an interesting market opportunity for banks and credit unions.
It begins with understanding the root of the issue. The underbanked population is underserved for three key reasons:
Cost of services
Frequently, the underbanked do not have enough money to meet minimum balance requirements. This indicates banks are setting standards that many Americans simply cannot meet, particularly in poor households.
Traditional business models of banks and credit unions charge service fees for account maintenance, overdrafts and enforcement of minimum balance requirements. Most underbanked consumers do not have the means to pay additional fees or the cashflow to sustain these accounts. They look at banks as a pricey option compared to another means.
Lack of accessibility to services
The recent branch closings at banks and credit unions have especially impacted consumers living in rural areas or small towns. These consumers do not have as much access to mobile phones or computers, and even if they have a phone, the internet connectivity is not reliable. This causes them to stay away from digital options and other products leading to lower access of available services, leaving them unbanked and underbanked.
A little more than half of the 3,114 counties in the US—51%—saw net declines in the number of bank branches between 2012 and 2017, a result of industry consolidation in the wake of the financial crisis of 2008.
A total of 794 rural counties lost a combined 1,553 bank branches over the five-year period, representing a decline of 14% in the number of institutions. The drop was much greater than the 9% drop in the country’s 802 urban communities that also saw a decline.
If you live in a so-called “banking desert,” there are fewer places to get a loan to buy a house and build individual wealth. There’s also less access to capital to start a business. This creates a negative feedback loop—because there aren’t safe places to access financial services or build wealth, people often resort to paying fees or exorbitant interest rates for alternative financial services.
Lack of trust
Previous FDIC surveys on socio-economic impacts suggest that underbanked consumers do not trust banks because of high interest rate loans or credit cards. Particularly, non-native consumers do not feel welcome because of language barriers and lack of knowledge about banking institutions, so they tend to stick with alternate lenders. In addition, native and non-native Individuals alike may dislike working with banks due to bad publicity or bad experiences in the past.
Simply put, being unbanked or underbanked is costly and disproportionately affects households with the fewest resources. It eventually pushes people towards debt. Access to safe and affordable financial services is vital, especially among families with limited wealth, whether they are looking to invest in education, start a business, or simply manage the ups and downs of life.
Banking the unbanked and underserved
Simply put, if traditional financial institutions (FIs) do not find ways to engage with the unbanked and underbanked, alternative financial services (AFS) providers will. And, with the rise of technology such as mobile phones and the internet, technology companies that have previously not offered financial services are likely to find ways to do so.
Traditional FIs should focus on reaching the unbanked and underbanked to:
- Create new opportunities for the emerging middle class
- Tap into a new customer segment that is not currently being served
- Build awareness and educate consumers to make better financial decisions
- Increase revenue by serving the unbanked and underbanked population
Fintech companies are recognizing that these consumer pain points are still not being addressed. Big tech companies like Amazon, Google, Facebook, and Apple are also entering the alternate financial services market. Retailers are also exploring the financial services market by partnering with a fintech to provide loans for their employees. Some are even starting their own fintech.
Banks and credit unions, however, have an existing infrastructure and reach that the others can’t claim. Financial education is the primary vehicle for building trust and serving unbanked and underbanked populations. And it is essential to helping customers make informed decisions. The only question left is who will secure this untapped market as their own.