Tuesday, June 11, 2013

Underbanked Trifecta: Strivers, Millennials & the Debanked

When I began this blog, in 2009, the notion that nearly a fifth of American households had little to no interaction with federally insured financial institutions wasn't much of a conversation starter. These days, even more Americans are unbanked or underbanked - about 1 in 4 households according to the FDIC.

But it's not as bad as it might seem. In the U.S. today there's a veritable army of companies vying for a piece of the $78 billion a year revenue pie that is the market for alternative banking products. Few of these companies would have stood a chance of attracting investors just a few years ago. But awareness is spreading - an awareness that first prompted me to launch this blog: there's a huge opportunity banks and credit unions are missing out on unless they embrace alternative customer service strategies.

Alternative is the operative word here, because increasingly Americans are choosing not to abide traditional banking institutions, with their stuffy rules, inconvenient offices and hours, and onerous overdraft charges. This is especially true of the so-called Millennial Generation: the estimated 80 million Americans between the ages of 18 and 34 who grew up never knowing what it was like to live without PCs, mobile phones or the Internet.

"This is a generational shift we're seeing," Jennifer Tescher, CEO of the Center for Financial Services Innovation (CFSI), observed last week at the start of the 8th Annual Underbanked Financial Services Forum. Harris Interactive recently polled a group of Millennials and found that although most had bank accounts (over 90%) nearly half (45%) also did business with non-bank providers of financial services, such as prepaid card, check cashing and payday loan companies.

There's no clear-cut definition of underbanked in America today. Some consumers are kept out of the system because of economic circumstance. Visa, the card giant, uses the term "strivers" to describe this demographic. The average "striver" is 42, is more than likely female and black/hispanic, and ends each month about $200 in debt, says Lisa McFarland, a Visa executive who spoke at the Underbanked Forum.

 Increasing numbers, however, are disgruntled consumers; the term "debanked" often is used to describe this group. "While the Unbanked are often misperceived as disadvantaged consumers living outside mainstream society, the Debanked are anything but underprivileged," says Ron Shevlin, Senior Analyst with the consultancy Aite Group. The debanked expect features and functions that are similar, yet better, than checking accounts.

"They want instant gratification," said Terri Ferrisi, Vice President at Cachet Financial Solutions. Cachet has developed a mobile check deposit solution that is used by several prepaid and check-cashing services, including, Ingo, the Good Funds Network (nee Chexar).

Several products and services that were demonstrated and discussed last week respond to that need for instant gratification, leading one speaker to quip about the new "just in time" consumer service model. Many of these will be described and discussed in future posts. These are a few of the more novel alternatives that were showcased:
eNova is an online micro-lender that says it aims to "fill the gap" between traditional lending products and payday loans - was showcasing NetCredit. NetCredit is used by customers in 5 countries and 32 U.S. states, who together have taken more than 4 million loans totaling over $3.5 billion since 2012. NetCredit loans are available for amounts up to $6,000 at rates that are "a fraction of the typical payday lending instrument," company executives noted during a demonstration.

Fuze is a payment network that rides on existing POS card network rails and enables transactions to any payment card from any other card. The company's reCHARGE service "fuzes" together existing networks to support activities like bill payments and prepaid card loads that get handled like any other transaction at the merchant checkout. ReCHARGE is up and running with several retailers, including Old Navy, as well as check cashing establishments.

Mitek, a San Diego firm that holds patents on several mobile image capture processes has developed a consumer bill-pay app for smartphones. It works pretty much like photo check deposit products. "This may be a transitory product, as paper bills are going away," said Mike Strange, Mitek Chief Technology Officer. But for those who still receive bills, this app saves money, helps them to avoid late fees and provides greater convenience.

PayPerks pairs engaging tutorials about products features and benefits with the excitement of sweepstakes to promote financial behavior changes that are good for consumers and make money for financial services providers. It won an innovators challenge at the start of the Forum. More than a dozen new products and services competed in that challenge

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