Underbanked Consumers: The Next Frontier?

Unchartered territory may yield exciting opportunities for CUs.

February 1, 2013

The terms “unbanked” and “underbanked” hardly conjure images of a multibillion dollar market.

But a 2012 study from the Center for Financial Services Innovation (CFSI) and Core Innovation Capital re-veals that consumers without traditional financial institution relationships aren’t necessarily without means.
In fact, the nation’s 68 million unbanked or underbanked adults will spend $85 billion on interest and fees in 2012, up from $78 billion in 2011, based on a volume of $682 billion in loans granted, funds transacted, deposits held, and other financial services rendered.
A CFSI executive calls this group “the last remaining white space” in financial services. 
“There’s a lot of unchartered territory here,” says Karen Biddle Andres, senior manager and consultant for advisory services. “There’s a lot of opportunity for credit unions to reinvent themselves to serve this market."
The underbanked market shows promising revenue growth, CFSI reports. For instance:
  • Short-term credit grew 10.9% from 2010 to 2011, while “very short term” credit (terms of one month or less, due in a lump sum) increased 6%.
  • “Very strong” growth segments in 2011 included subprime credit cards (39.4%), Internet payday loans (32.4%), and open-loop prepaid cards—both payroll (21.8%) and general purpose reloadable (21.6%).
  • Subprime auto loans, which grew 9.9% from 2010 to 2011, represented the largest revenue segment at $27 billion—accounting for more than one in three revenue dollars in the underbanked market.

Other trends to consider before entering this largely unfamiliar territory:

  • Online and mobile technology drives product use. Access to mobile technology by underbanked con-sumers will continue to grow. Providers that rely on older technologies and revenue models will lose out.
  • Consumer protection laws and regulations will propel an evolution in products and pricing.
  • Pent-up demand and a loosening in credit standards will lead to continued growth in subprime auto lending and credit cards. Consumers with subprime credit held 27% of all outstanding auto debt at year-end 2011—and generated half of all  interest revenues.
  • Emerging products—deposit advances, Internet payday loans, and prepaid cards—are increasing their market share compared with storefront payday loans and check-cashing products.
Credit unions, with their competitive pricing, consumer-friendly policies, and service-focused staff, seem ideally suited to help underbanked consumers move forward.
Biddle Andres’ advice for getting started: Research your membership base, examine emerging technolo-gies, and rethink fi nancial education from a sole focus on imparting knowledge to encouraging changes in behavior. 
“Given their mission,” Biddle Andres says, “credit unions are well positioned to help people build their financial capability.”
BILL MERRICK is senior managing editor at Credit Union Magazine.