The Underbanked: Great Growth Opportunity in Retail Banking

The industry is recovering from one of the greatest depressions in our lifetime with a near collapse of the banking system. A renewed optimism is fuelled by higher level of consumer confidence with 257,000 jobs added in January 2015. As the economy continues to gain steam, financial institutions are focused again on driving growth as a vehicle to increase shareholder value and market share. A key area of renewed interest is the “underbanked” sector of the population that, based on a 2013 FDIC report, represents 20.0 percent (24.8 million) of U.S. households. This group is defined as having a bank account but also uses alternative financial services (AFS) outside of the banking system and represents approximately 50.9 million adults and 16.6 million children.

The FDIC report noted the highest underbanked rates continued to be found among non-Asian minorities, lower-income households, younger households, and unemployed households. According to a new survey by KPMG LLP, about 23 percent of bankers polled say so-called underbanked customers offer the greatest growth opportunity for their retail banking. KPMG study also identified that the underbanked segment goes beyond low-income customers to include high school and college students or recent graduates. However, the survey also shows that 32 percent of bank executives believe that asset and wealth management, a less capital-intensive areas of banks’ businesses favored by some banking regulators, will be the top growth driver for their retail banking over the next one to three years. With all of this interest in wealth management targeting the affluent baby boomers who are nearing retirement, banks are missing out on providing services and offerings to the underbanked, a growing segment of the population that tend to demonstrate a higher degree of loyalty to financial institutions.

Our 35 years experience in the retail banking industry and experience design (including TD Bank Group, RBC, and FEI Canada) support the belief that this customer segment provides a viable growth opportunity for retail banks given the competitive nature of the industry.

Since the underbanked is representative of a wide demographic and psychographic spectrum of the U.S. population, banks can leverage existing transactional tools and digital initiatives, in addition to leveraging their physical channel networks. The importance of underbanked consumers is not limited to only banks. Walmart and other retailers, in addition to credit card organizations, have identified this group as a viable opportunity for growth by launching unique and differentiated offerings. Walmart and Kroger offer low-cost check cashing services while American Express, through their Bluebird prepaid card, provide underbanked with access to much-needed cash while not having to rely on conventional retail banking services.

Since this segment of the market tends to pay higher service fees and tend to be ignored by most banks they are vulnerable revenue to disruptive online startups to fill this gap. With this shift there is a sizeable long-term risk for banks that are ignoring this segment. It is important to note the greater percentage of the underbanked are Generation X and Y entering the workforce and looking at building a relationship with a financial institution, with more than 35 percent of underbanked cited their interest in opening a bank account in the future. The question banks need to be asking themselves in the event they are overlooking this opportunity is, “ Will the current underbanked consumers build credit worthiness and equity that would provide future revenues that are at risk to be disrupted by new and emerging businesses?” Some of the leading financial institutions and retailers have identified significant risks in ignoring this segment as they start earning wages and building equity. Disruptive alternatives have the potential of weakening the future generation of banking customers by offering them lower cost alternatives to conventional services and becoming surrogate alternatives.

Not all is lost as banks can provide a range of solutions for the underbanked that build a strong foundation for long-term profitable relationships before and after they start building wealth and equity.

There are also several transformation opportunities around process, structure and message worth considering; I discuss these opportunities in my next post: Retail Banking: Potential Transformations to Serve the Underbanked