The Risks and Rewards of the ‘Unbanked’ and the ‘Underbanked’

The “unbanked” (those that have no banking relationships) and the “underbanked” (those with limited access to banking services) offer considerable returns for institutions willing to invest the time and effort to understand the inherent risks and rewards.

There are a number of reasons why these sectors have been overlooked in the past. Typically, the unbanked and the underbanked have low incomes, high unemployment and lack of financial literacy. To make matters worse, they often have accumulated bad financial habits that make many traditional banking products unsuitable for their use.

Banks have not historically provided incentives to encourage these individuals to establish banking relationships. As a result, a number of nontraditional companies such as “payday” loan companies and check cashing services have sprung up to cater to this sector. Given the approach to this sector and the influx of nontraditional competitors, targeting the unbanked and the underbanked requires new, innovative approaches.

The following steps can help your bank target these sectors:

Understand why banks are disregarded. The unbanked and underbanked have a number of reasons for not not doing business with a traditional bank. Take the time to understand their perspectives and subsequently reconsider your bank’s current branding and marketing message. You may want to refine it to target this market.

For example, financial literacy is generally lacking in the unbanked and underbanked sector. Make sure that your marketing materials are not overly complex and full of bank-specific jargon. Use plain English to explain the features of your products and use practical examples of how establishing a banking relationship benefits a potential customer’s life.

If your community has a large population of non-English speaking residents, translate your marketing materials and brochures into the applicable languages. Consider taking out ads in local foreign language publications and adding bilingual employees to assist non-English speaking customers. Your local Chamber of Commerce might be able to provide information about the population makeup in your area to see if an investment in printing costs and translation is justified.

Also ensure that the fee structure is easily understood. The unbanked and underbanked are particularly sensitive to fees as they generally have minimal income to begin with.

Make it easy to do business. Doing business should be as easy as possible. Obviously, your institution must conform to banking regulations. However, complex new account opening forms that are hard to follow can quickly alienate potential customers from the unbanked and underbanked sector.

Within the branch network, consider dedicating a member of staff to assist these customers with any questions they have regarding new account applications. If your bank has a call center, make sure that employees can also answer questions from the unbanked and underbanked as they begin the application process.

Educate for success. Contrary to popular belief, the unbanked and underbanked are often quite adept at managing what little funds they have at their disposal. With less household income available, the margin for error is low.

Increasing the financial literacy of these customers and providing additional tactics they can use for cash management can help address a critical need, as well as increase the customer’s loyalty to your institution. Financial education that helps this sector do more with less, plan for the future, and ultimately increase financial stability benefits your bank and the customer.

Innovate and monitor. Just like mainstream customers, the unbanked and underbanked have financial needs that include low dollar loans, checking and savings accounts, insurance and low-limit credit cards. The inherent risk of providing these products is considerable, but with appropriate oversight and monitoring in place, the risk can be proactively managed.

Consider tagging accounts deemed high risk for additional scrutiny by your bank’s operational risk or fraud department. Your bank’s perspective on what is acceptable risk may have to be revised as it relates to this subset of accounts. Since accounts owned by the previously unbanked and underbanked may initially seem less stable than the bank’s regular customer accounts, employees tasked with reviewing the accounts should exercise caution when deciding to close them.

Closing an account before the risk is fully understood and managed may be counterproductive and result in tremendous frustration for the ex-customers and those involved in the account acquisition process.

Be ready and willing to say “no.” Despite your bank’s best efforts and its desire to capitalize on this sector, many of the unbanked and underbanked are not suitable candidates for traditional banking services. In fact, traditional banking services may be unsuitable for potential customers in this sector to the extent that it actually results in significant financial harm.

For example, providing credit cards, even with a low limit, may actually result in the customers becoming accustomed to incurring debt. They may subsequently be unable or unwilling to pay back the amount borrowed, which in turn can result in negative reporting on a presumably already low credit score.

For more information on how we can help your community bank, please contact Sonny MacArthur at smacarthur@pkm.com or 404-420-5631.