Poverty is the next big business in banking — but there are plenty of pitfalls before it becomes the next big success in banking.
Selling financial services to low-income customers has long appeared unprofitable at best, and a reputational risk at worst. From subprime mortgages to hidden credit card fees, banks have gotten a bad reputation for preying on poor people. Some banks always avoided those products, and the financial crisis and new regulations have restricted the industry's ability to sell many of them but the public image of the predatory banker has only grown stronger in the post-Occupy Wall Street era.
At the same time, high unemployment and the ongoing housing crisis have moved many Americans down the income ladder, out of the traditional bank branch and into the storefront check casher or the Wal-Mart (WMT). Now banks, starved for profits and nursing tattered reputations, are increasingly trying to serve those customers in new ways — as long as they can figure out how to do so profitably.
"There's tremendous enthusiasm about this market, both as people come to understand this market, and as it's gotten bigger in the wake of the financial crisis," said Jennifer Tescher, head of the nonprofit Center for Financial Services Innovation.
She was speaking on the sidelines of the crowded Underbanked Financial Services Forum last month, an annual conference sponsored by CFSI and American Banker, which this year drew about 750 bankers, microlenders, nonprofit staffers and executives from nonbank financial companies.
Many of those companies are developing products for customers who no longer qualify for traditional checking accounts, or who keep some of their finances outside of the traditional banking system. Some banks and an entire nonbank financial sector have sought to do business with these so-called underbanked customers for years, but in recent months their appeal has become more mainstream.
JPMorgan Chase (JPM), the country's biggest bank, this month started widely selling a prepaid debit card that customers can use in lieu of a checking account, joining competitors including American Express (AXP), U.S. Bank (USB) and, a few days ago, PNC (PNC). Wells Fargo has long offered remittances and other financial products that many people buy at Western Unions and MoneyGrams, and now it has competition from banks including Regions Financial (RF) and Fifth Third (FITB) to offer customers cheaper, if still controversial, variations on payday loans.
Bankers at those companies acknowledge that they see a new opportunity to earn revenue from the poor, but they also say that want to meet legitimate customer demand for financial services that go beyond the checking account and the credit card. In the process, they say, perhaps they can help repair the banking industry's reputation for exploiting poor people.
"As far as what we face as an economy, financial institutions have been the whipping boy across the board. This is an opportunity to try to show … what we want to do to support our consumers," Poppie Parish, a senior vice president of community development banking at KeyBank (KEY), said in an interview.
The Cleveland bank has broadened its services to compete with check cashers and payday lenders, and it has won tentative praise from consumer advocates, who call its short-term, small-dollar loans "much more affordable" than some bank-offered payday loan products.