Retail Banking: Potential Transformations to Serve the Underbanked
With 20.0 percent (24.8 million) of U.S. households falling into the “underbanked” market segment of the retail banking (2013 FDIC report), almost 25 percent of bankers see this segment as a growth opportunity. To serve the underbanked, there are several transformation opportunities in retail banking trends around process, structure and message worth considering.
The first lever for transformation change based on years of looking at how brands can better align with customers needs is “Process.” This lever represents the steps or path-to-purchase dynamics that can drive profitable growth for financial institutions considering marketing services to the underbanked. I have listed a range of ideas to be considered that take into consideration processes.
Generation X and Y have the highest usage of online and mobile services and the advent of digital wallets provides a new opportunity to cater to this group. Furthermore, based on the FDIC report, more than 55 percent of underbanked consumers use online banking with 33 percent noting this is their primary method of banking.
Understanding the growth of mobile banking and digital wallets, to which underbanked are late to the party with only 23 percent using this channel to manage their banking needs, banks should be creating branded platforms that cater to their needs such as access to mobile-based prepaid services. The real risk for banks is the rapid growth of alternative forms of cash that are becoming mainstream and may undermine the legitimacy and relevancy of retail banking. Providing a mobile and online solution will provide an offensive strategy to ensure new banking and cash management behaviors remain the realm of financial institutions.
Access to cash, especially for the older underbanked consumers, provides a platform for branches to build relationships, while financial institutions will need to entice Gen X and Y to visit retail branches including opening new accounts and other services. More than 78 percent of underbanked used tellers to access their accounts with 32 percent citing this was their primary method of accessing cash. The branches can play an important role in providing the underbanked with guidance and advice including seminars on how to gain control of their financial lives. In addition, physical environments provide a strong platform in building relationships with the younger underbanked consumers who are looking at establishing their credit worthiness. Since the majority of the underbanked have never had a checking or savings account, they have limited experience in banking and ineffective financial planning.
With the rapid growth of Video ATMs and underbanked consumers’ reliance on conventional ATMs (69 percent), there exists an opportunity to drive more transactions to this form of banking, reducing the cost of transaction. TD Bank’s recent study found 71 percent of the unbanked use cash for daily purchases, compared with 30 percent of the overall population. ATMs are a great platform to ensure this segment has access to cash. In addition, the growth of video ATMs also overcome the challenge of adequate customer ID that was cited in the FDIC report as impacting 17 percent of underbanked consumers.
Video ATMs provide a strong platform to provide access to virtual bankers during after hours of conventional retail banking, as a greater percentage of underbanked consumers have multiple jobs and long working hours. The new video ATM platform provides more than 90 percent of conventional teller services.
Structure is the second lever for change through identifying potential product portfolio or service offerings that caters to the underbanked segment of the population, while minimizing risks for financial institutions.
Banks have an opportunity to develop products that cater to the underbanked such as unique prepaid cards or debit cards that provide this segment of customers with the ability to build their credit worthiness. These new products will need to find the balance between opportunity without violating the ever-growing watchful eye of Consumer Financial Protection Bureau regulations. Banks can take a leadership role ahead of regulators’ criticism regarding current deposit-advance loans, remittances, prepaid cards and overdraft services. For example, JPMorgan Chase had launched their Liquid prepaid card largely to serve its 8.7 million customer households with less than $75,000 in annual income.
Social responsibility is a critical foundation to how banks market themselves. Research has shown how providing easier and cost-effective access to cash and banking to the poorer segment of the population impacts crime reduction. Banks may want to rethink their philanthropic initiatives to create not-for-profit foundations with a primary focus on meeting the emotional and physical financial needs of the underbanked and unbanked consumers.
Financial institutions and retail banking need to assess the benefits of meeting these needs as part of their contribution to society and the community while alleviating regulatory oversight on how these segments are served. I believe the development of such initiatives provide a win-win strategy for both banks, regulatory bodies and the consumer markets.
Message is the last of the three levers for change and is primarily focused on communication and branding elements that most effectively engage the underbanked.
A key complaint by the underbanked segment is the cost of hidden fees and charges for accessing cash. Banks can do a better job of communicating to this segment the various risks and also better cash management solutions that would deliver lower costs. Providing transparency is a pivotal factor for banks in developing trust within the community and goes a long way in instilling confidence in their ability to be trusted with all members of the community’s investments and financial equity.
Building on the portfolio concept, there exists for retail banks to provide branded services and products that instill a sense of dignity and confidence for the plight of underbanked consumers. Product and service branding should leverage the inherent benefits and lifestyle aspirational values of this segment, allowing them to feel part of the community versus victims at the mercy of financial institutions. It was interesting to note the second largest reason the underbanked did not have a banking account was lack of trust with banks at large (34 percent) while an additional 10 percent identified the reason they did not have a bank account was the fact that banks did not offer needed products or services.
The underbanked provide a significant opportunity for banks to gain market share and build brand loyalty. However, to appeal to this segment that is already disenfranchised by financial institutions, it will require unique products that provide them with control as part of their financial life delivered through branded programs that leverage transparency as the core value.
Click here to read part one of this series on serving the underbanked: The Underbanked: Great Growth Opportunity in Retail Banking.