The natural implication of the term “unbanked” or “underbanked” is the absence or underutilization of a bank. The assumption is that un- or underbanked people should become banked. While this will be true for some, I believe that a majority of the 60 million underbanked people in the US will not be “better” served by banks.
And I mean “better” broadly, both from the perspective of the consumer, as well as paternalistically, or quote-unquote “objectively.” For 10s of millions of underbanked people, banks don’t do the trick today and likely won’t ever: by and large banks don’t offer instant liquidity, charge expensive and esoteric fees levied in auto pilot down the road, don’t have comfortable branches, don’t have conveniently located branches, don’t speak the right language in branches, aren’t open at useful hours, don’t offer the suite of products needed, require too much ID, are perceived as a branch of the government, are not trusted, feel intimidating and are perceived to be “for the rich.” (CFSI and others have done authoritative research on the reasons and are not reflected here in any particular order).
People’s financial lives can improve, get worse or stay the same. The latter two will unlikely make a bank more attractive, from the customers’ point of view. If someone starts earning more money, a bank will become more relevant, but I believe there is a big window of an individual’s financial growth before the tipping point when a bank becomes obvious, even for completely law abiding underbanked Americans. I’m not sure what the right numbers are, but to illustrate my thesis, someone who is un- or underbanked at $25k annual income could easily remain so even as they earn as much as $50k, perhaps even $75k, largely driven by the perceptual barriers about banks (instead of the product/location barriers which would erode as someone’s net worth improves).
The two most obvious “types” of perpetual underbanked, in my mind, are young people and recent immigrants. Both value liquidity, prefer up-front fees, and basically dislike or distrust banks quite profoundly. We’re seeing Gen Y stick with bank alternatives – from check cashers to prepaid accounts – even as their income improves; same with Latinos and other first generation immigrants. Big banks, like Ally and ING Direct, are branding themselves as newer, simpler, nicer “anti” banks. And startups like Plastyc, PerkStreet and BankSimple are delivering (or promising) better products and experiences to consumers who may be perpetually underbanked.
And for those of us who believe we may “know better” what’s “good” for someone (even if they may disagree), being perpetually underbanked needn’t be so bad. In fact, it could actually be better for many. Let’s face it, most retail banks are in the dark ages compared to the customer satisfaction revolution started by the likes of Amazon and today by the Zappos’ and Diapers.com’s of the world. Whenever banks get creative it’s bad news. My vision for the future of financial services places banks in the back office, as the regulated infrastructure of our financial vicissitudes. Let them work with businesses who know and love and understand and reach the consumer, as they do now in the prepaid account revolution. Let them provide loans through smaller, nimbler customer experts, like Progreso Financiero – who knows, loves, understands and reaches their Latino customers. Let them offer savings products to check cashers, and auto loans through dealers. Let’s transform the “underbanked” to travelers to financial freedom even as the bank takes a back seat role.
Arjan,
I agree with your main point. Of the 60 million underbanked consumers in the U.S, only a small subset would be an appropriate fit for a traditional banking relationship at a traditional financial institution. You have to look at fit both ways. Many underbanked consumers are a bad fit, not because they are bad credit risks, but because of some personal reason (trust, languague, culture, convienence, etc.). Many other underbanked consumers are bad fits from the banks’ perspectives. They are just too risky or they want exotic financial products that are not (and will never be) offered by traditional financial institutions.
When you cut down the “total U.S underbanked population” from both the consumer and bank perspectives, the remaining market just isn’t a very good opportunity for mainstream financial institutions.
“The assumption is that un- or underbanked people should become banked.”
No: I think the point of identifying the unbanked as a segment is to offer them access to products sold in the modern marketplace – i.e. ecommerce whether buying tickets to a rock concert or Lima Peru online, whether collecting medicare/medicaid benefits electronically… just because they dont want or cannot have a bank account for whatever reason, their purchasing dollars still constitutes a real market segment that merchants would want to tap into;