Tuesday, February 12, 2013

How Well are Banks at Reaching Financially Underserved?

United Stated dollar sign puzzle
Anyone who still wonders why there are so many unbanked and underbanked in America here's the Number 1 reason: only 4 in 10 U.S. banks design products that address the basic financial needs of low-income consumers.

The data is contained in a report released last month by the FDIC.

FDIC Chair Martin J. Gruenberg said banks have made some real advances in serving the needs of this segment of consumers. And that has been the case; in 2009 the FDIC reported that only 25 percent of banks targeted marketing to reach the unbanked and underbanked. However, the country's unbanked population grew during those same 2 years, by almost 1 million. (Check out this previous post for more details from a report on unbanked and underbanked consumers the FDIC issued in September 2012.)

The 2011 FDIC Report of Banks' Efforts to Serve the Unbanked and Underbanked draws from results of a voluntary online questionnaire completed by over 500 U.S. banks representing various asset sizes. It addresses marketing and retail strategies, basic account features, auxiliary products (think money orders, check cashing and prepaid debit cards) and financial education and outreach. And it includes detailed data sets.

Among the less than stellar findings reported:
  • Almost all surveyed banks require an initial deposit of at least $100 to open a basic checking account
  • 20% impose monthly service fees of $3.00 or more; although nearly two-thirds charge no monthly fees when account-holders use Direct Deposit.
  • Only 21% offer "checkless," card-based checking accounts
  • 20% offer "second chance" accounts to individuals who don't qualify for basic checking accounts
  • 71% cash payroll checks; 47% offer this service to both account-holders and non-account-holders
  • 68% offered domestic remittances to basic account-holders
  • 11% provide domestic remittances to non-customers; 9% offer international remittances to non-customers

In addition, 80% of surveyed banks offer small-dollar unsecured personal loans; the minimum loan amount at most (53%) is between $1,000 and $2,500.

There are no minimums on small-dollar loans at 43% of banks. Generally, these loans are made with repayment terms of 90 days or more and annualized interest rates under 36%. Typically, the banks offering small-dollar loans approve such loans in less than 24 hours.
How Can Banks Reach the Underserved?

The FDIC report also highlights opportunities to increase access to basic financial services. These are pretty basic suggestions, such as "Expand Offerings of Basic, Low-Cost Checking and Savings Deposit Accounts." Banks can do this by offering low-cost card-based (checkless) checking accounts, the report noted.

The report also suggests banks broaden offerings to underserved households to include, for example, check cashing, money orders and remittances.

It also recommends that banks enhance marketing of small-dollar loan products, noting that at least one-third of consumers who borrow from payday lenders and pawn shops complain that banks don't offer small-dollar loan products.

Perhaps most importantly the report urges banks to partner with community organizations to promote bank account ownership. Like the BankOn programs that have been springing up all over the country. (Check this post for more about BankOn programs.)

The 2011 FDIC Report of Banks' Efforts to Serve the Unbanked and Underbanked is available for downloading from the FDIC's website.

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