Banks Counseled to Meet the Underserved

June 24, 2011

It's ironic really: America's financially underserved came to be that way because, let's face it, banks really didn't want to play with the poor. Now, three years into a sagging economy have taken a toll, and there's an emerging recognition of the difficulties of growing an economy when upwards of a quarter of the population isn't playing with banks.

KPMG LLP is the latest to suggest banks are losing big by ignoring the poor. And the consultancy is urging banks to consider new business models (as well as products and services) to turn things around.

KPMG's data crunching suggests the underserved market includes 88 Million adult Americans with nearly $1.3 Trillion in annual income, and that as many as 6 million additional Americans could join the ranks of the underserved within the next two years given current economic conditions.

"In the current environment, we see heavy competition among banks chasing customers with high credit scores, with decreasing margins, leaving the underserved market for those willing to invest in it," said Carl Carande, head of KPMG's banking and finance practice

KPMG considers the "underserved" population to be those individuals without bank accounts (the unbanked) and the "underbanked," which it identifies as those who lack access to incremental credit. This differs from other characterizations of the underserved market. The FDIC, for example, makes distinctions between the "unbanked" and the "underserved," with the underserved moniker used to identify those individuals who have some type of relationship with a bank, but who also use non-bank financial services providers (payday lenders, check cashers and the like).

Segmentation, New Products & Services

KPMG says its study of the underserved market identified four segments among the financially underserved, each with distinct socio-economic characteristics. Briefly, these are:

1. Unbanked folks, age 18 to 40, often recent immigrants, earning between $12,000 and $35,000
2. Rebuilders, typically between 30 and 55 years old, are folks trying to rebuild their credit scores after a spate of bad luck (e.g.: unemployment, foreclosure). Their incomes range from $50,000 to $150,000, they have at least one checking account, but they have little to no savings. They have limited access to credit cards, and may use payday lenders.
3. The Work-to-Pay crowd are those folks 18 to 30 years old, typically hourly workers earning $18,000 to $40,000 who may have trouble maintaining consistent employment. They use payday lenders, stored value cards and cash, and they're very comfortable with debit cards.
4. The Emerging Retail segment consists of consumers age 18 to 26 with incomes ranging from $25,000 to $60,000. Typically, these folks are recent high school or trade school grads who are tech savvy. They pay bills on time and online, they use mobile phones, they're willing to pay for convenience and they're receptive to learning money management.

"Customer segmentation is critical to serving the underserved market and each target segment requires a disciplined and strategic approach," said Timothy Ramsey, a Managing Director at KPMG.

"The KPMG study indicates that the underserved market is growing quickly because millions of wage-earning adults are unfortunately moving from the 'average' credit score to the 'damage' credit score category due to negative events" (e.g.: job loss, foreclosure), said Atif Zaim, financial services sector leader at the consultancy. "There are a number of services that banks can offer this segment as they recover or move up the value chain."

But these may require new delivery channels and marketing techniques, Zaim suggested.

Possible new product offerings include international wire/card transfers, walk-in bill payment , check cashing (for non-customers), secured credit cards and prepaid debit cards.

The big question remaining: Are America's bankers paying attention?

More than 800 million adults with bank accounts live on less than $5 a day

_{-Financial Access Initiative}