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'Underbanked' Is an Increasingly Unhelpful Label

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This month, I spent a few days with some 750 people focused on the underbanked market opportunity. These bankers, retailers, technology start-ups, regulators and advocates gathered in San Francisco for the seventh annual Underbanked Financial Services Forum, organized by the Center for Financial Services Innovation and American Banker. What was the buzz? Here's my top 10 list:

  1. The underbanked are mainstream – so what do we call them? Un- and underbanked consumers make up a quarter of the U.S. population and growing, and they increasingly come from all walks of life. The consensus is that the "underbanked" language is hindering the industry's ability to paint an accurate picture of the market opportunity and the range of potential solutions.
  2. The voice of the consumer speaks volumes, and financial providers are listening. Why? Because putting the customer at the center produces experiences that delight and keeps customers coming back for more. Creating memorable experiences requires more than focus groups, though. It requires delving deeply into their everyday lives.  
  3. Comprehensive needs require comprehensive strategies. Increasingly, providers are focusing on household balance sheets to develop fuller pictures of consumers' financial lives and a broader set of offerings to meet their needs. While banks are more likely to launch suites of products and services, even the monoline product providers are waking up to the business model realities and devising ways to expand their offerings and build longer-term customer relationships.
  4. Transactions don't have to lead to "graduation." Cashing checks, paying bills and sending money home represent core financial needs, yet they still cause tremendous friction in people's lives. There is value in offering these services in ways that are convenient, competitively-priced and hassle-free – whether or not they lead to an account.
  5. Financial education is out; changing behavior is in. The behavior that is getting the most focus these days is savings. A growing number of start-ups are seeking to make saving fun, easy and social. If their techniques and business models work, they may be exportable to other behaviors.
  6. The need for credit is clear; how to meet the need is not. Small-dollar credit continues to be a major hot-button issue, particularly now that the Consumer Financial Protection Bureau has waded in. Aside from the handful of banks offering salary advance products, most of the limited innovation is coming from venture capital-backed start-ups. Virtually all are seen as controversial. Further progress will require a broad dialogue about what makes for a high-quality credit product. 
  7. Non-traditional credit data has become traditional. Ten years ago, the notion that rent and utility bill payments should as a matter of course be part of a consumer's credit file was crazy talk. Today, those data are increasingly making their way into the primary databases at the Big Three credit bureaus. Meanwhile, a small cadre of newer companies is mining and analyzing a vast array of additional data to provide greater insight into consumer creditworthiness.
  8. Wake me when the mobile wallet wars are over. The greatest near-term potential for mobile financial services is in what it can do to take the friction out of cash and checks. Deploying remote deposit capture technology for check cashing on the go is the next big thing. The other trend is combining mobile with kiosks and offline channels to digitize cash transactions. 
  9. Regulation as an impetus for innovation? Regulatory uncertainty is still perceived as a challenge, but the industry is beginning to move from anger to acceptance. An emerging question is whether the CFPB, with its dual mission of access and protection, can provoke the kind of industry innovation needed to yield high-quality products that meet a growing consumer demand.
  10. The watchword of the day is quality. Financial providers like to talk about innovation, especially when they are at a conference held in the Bay Area. These days, though, they are just as likely to talk about quality. At a minimum, the times we live in demand it.

There's more to it than reputation. My organization's hypothesis is that high-quality products and experiences are good for consumers and good for business, thus creating a virtuous, self-reinforcing loop. That's the big idea behind our Compass Principles, a blueprint to guide the design and delivery of basic financial products.

Now we want to prove our theory. I challenged the companies attending the conference to make public commitments to quality, and to have their efforts measured. Did customers fare better as a result of product enhancements or changes in business practices? Did the changes result in positive financial outcomes for the company?

Five companies have heeded the call so far. Will yours be next?

Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. 

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Comments (1)
Thanks for a great summary of the event. I do think you under-emphasized the importance of immediate access to cash. This seems to be the common thread in alternative financial services. It is very different than the majority on banked consumers. In fact, it seems that banks embraced the idea that most consumers want no- or low-fee accounts and will accept delays in exchange for free. For example, my free-checking account places holds on my checks while they clear, and I am usually okay with that.

I am reminded of a column you wrote last year referring to a Brookings study which shows almost half of all households could not come up with $2,000 in 30 days - including nearly a quarter of households making between $100,000 and $150,000. These financially fragile households are more likely to use alternative financial services because their financial need for immediacy isn't being met by mainstream bank products. In reality, there are times when all consumers would likely pay a premium for immediate access to their cash.

As banks embrace the idea that "transactions don't have to lead to graduation" (your fourth point), there is tremendous opportunity for new financial products that provide immediate access to funds, for a fee. Those products will not only appear to the current under-banked, but to any consumer seeking better access to their funds.
Posted by eric | Friday, July 06 2012 at 1:31PM ET
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