= Subscriber content; or subscribe now to access all American Banker content.

Reaching the Underbanked? Try Offering Control, Research Says

The 37 million American adults who are underbanked have a tough time when it comes to basic financial activities such as paying bills.

His latest research on this segment forced Mark Schwanhausser, director of multichannel financial services at Javelin Strategy & Research, to reflect on the lives of the banking have-nots. "It paints a picture of how difficult it must be to be underbanked. It's hard to understand what life would be like without a basic banking account. It's like oxygen. A prepaid card may be a different flow of oxygen. But you have to have some kind of financial building block in which to start building access to credit, one of the aspects of building a life."

People who are underbanked tend to carry wads of cash in their pockets and have to physically walk into a utility office to pay bills, into a store to pay off retail cards, or into a Verizon or AT&T storefront to pay off a cell phone bill in cash. "That seems like a lot of wasted time and effort for what could be replaced by a digital payment," Schwanhausser muses.

Some companies are striving to meet this need, such as American Express with its Bluebird account. The Bluebird provides online and mobile bill payments for free as well as mobile check deposit, and lets customers top up their cards at Walmart. "This is the kind of feature set that adds up to benefits to customers," Schwanhausser says. "It's a viable alternative if it's priced appropriately. It lets them buy things online and book hotels and rental cars."

But banks don't have to sit on the sidelines when it comes to the underbanked, Schwanhausser says. "It's a challenging segment, because some have economic or cultural obstacles to banking. But there's an opportunity to service this community through banks," he says. "We already see examples of banks like Regions, Key Bank and Wells Fargo that have let non-customers come into a branch and receive services and transactions at an affordable price, in a way that's good for the customer and the bank."

Regions offers Now banking services for customers and non-customers that include check cashing at bank branches, reloadable prepaid cards, money transfers, and walk-in bill payment.

KeyBank has KeyBank Plus Centers in six states at which people who do not have KeyBank accounts can cash payroll, tax refund, or government checks for a 1.5% fee.

Wells Fargo offers international money transfer services that compete with Western Union and MoneyGram. It also offers a Visa secured card for which the customer deposits $300 to $10,000 into a "collateral account," and then can charge up to that amount on the card. The annual percentage rate is around 18.99%.

What these banks are after is "the opportunity to bring a customer in early and train them in the online and mobile channels so that you're cost efficient, working paper out of the system," Schwanhausser says. "Who wants to let a potential market slip away if there's a way to serve it profitably?"

Some banks, such as BB&T and U.S. Bank, have begun offering prepaid cards to this market as an alternative to a checking account.

However, even when a customer has a prepaid account, the bank still needs to figure out how to get that person to use the account and how to become more broadly useful to that customer, Schwanhausser says.

A combination of online banking, mobile banking, PFM and financial alerts could give banking newcomers the sense of control and oversight they need, Schwanhausser suggests.

Green Dot's GoBank, a debit card and mobile banking app, has the right ingredients to appeal to 24-35-year-olds, the older half of Generation Y, Schwanhausser says -- oversight, alerts, online and mobile access. "But what they don't have is something that those consumers need, which is depth of banking products," he says. "We see older Gen Ys settling down, picking a bank, starting to pay bills and take out car loans and mortgages. If a GoBank doesn't have that repertoire, then that consumer has to look elsewhere."

Schwanhausser divides the underbanked into two broad classes. There are those that haven't decided they need a bank account, for instance a college student whose parents send him prepaid cards. Such customers can simply go to a bank and set up an account when they're ready.

The other category, the one that concerns consumer advocates more, has an obstacle in the way of getting a bank account. It might be unemployment, underemployment, or poor credit history. Some are immigrants who don't trust banks. "But they still need financial products," Schwanhausser says. "How do you provide this to people who are higher risk and need to move money around? I'd rather see consumers coming to a place that doesn't' have bars in the windows, that is a lower risk, and not working people into a cycle of debt, trying to induce them to make financial missteps."

Some banks have been criticized for high-rate small-dollar loans, similar to payday lenders. A recent New York Times article suggested that some large banks work with payday lenders by letting customers make automatic deductions from their checking accounts for the loan payments, yet neglecting to stop payments when customers ask them to, because they want to accrue overdraft fees.

"It seems Machiavellian," says Schwanhausser, who doubts there's true complicity there.

The key thing for banks to do, he believes, is to think about features that will give the underbanked consumer a sense of control over his finances. "When you're designing a prepaid card, you've got to think about the tools to check balances, top up, set up bill reminders, make bill payments, and tie in fraud alerts," he says. The next level of PFM is to extend the relationship beyond banking transactions, to mobile banking features like comparison shopping and reminders when a retailer has dropped a price after the customer bought a product, he says.


(13) Comments



Comments (13)
Regions uses Chexar, now IngoMoney, to cash checks charging between 1% and 5% to cash a check. Now compare this to Certegy check cashing which is $3 up to $1,500 and $6 up to I believe $5,000. Available at many grocery stores and at Walmart any time they are open.

Bluebird is a disaster. Read the Google Play reviews that focus on the account itself not the app.

Posted by Jim Jackson | Thursday, July 04 2013 at 2:43PM ET
Regions Bank has done some studies similar to this and found that immediate access to cash is the primary concern for this market. This is consistent with the idea of control over finances that was stated by Schwanhausser. Through control or ease of access to funds, the underbanked consumer is allowed the freedom that traditional services may not provide them. This should be a focus when attempting to reach the underbanked. The example of Bluebird is a great one, as it shows the direction products must go in order to capture this need in the market.
Posted by Eric Lindeen | Monday, March 18 2013 at 10:16AM ET
No problem. Its hard being like Sheldon on Big Bang Theory... way too literal. My poor husband.
Posted by sjnewport | Monday, March 11 2013 at 8:57AM ET
Sorry, it was a poor attempt at sardonic wit.
Posted by frankarauscher | Monday, March 11 2013 at 8:10AM ET
Please do not compare consumers who prefer to manage a budget by pocket cash and pay all of their bills and daily expenses in cash to illegal drug activity being tracked by the DEA. Not everyone has been brainwashed to believe you must use plastic and leave an sudit trail to live.
Posted by sjnewport | Monday, March 11 2013 at 6:25AM ET
Please do not compare consumers who prefer to manage a budget by pocket cash and pay all of their bills and daily expenses in cash to illegal drug activity being tracked by the DEA. Not everyone has been brainwashed to believe you must use plastic and leave an sudit trail to live.
Posted by sjnewport | Monday, March 11 2013 at 6:25AM ET
For statistics on cash, you can start by asking the Drug Enforcement Agency.
Posted by frankarauscher | Saturday, March 09 2013 at 9:09AM ET
Where are the statistics which support the number of consumers who prefer to carry and pay by cash? Not everyone supports a complicated lifestyle, constantly rushing, burning both ends of the candle.

You would be surprised how easy life is when you pay everything by cash!

Do not ASSUME people are underbanked. Maybe they are right-banked by being no-banked by choice.
Posted by sjnewport | Saturday, March 09 2013 at 5:14AM ET
India's Financial Inclusion agenda has good lessons from the approaches to underbanked in US. Hopefully they would follow suit.
Posted by yerram | Thursday, March 07 2013 at 8:22PM ET
JEN is correct. Consumers need that control because they have been abused so badly when they trusted their consumer banks to help them be financially prudent. And the banking industry will continue to be tainted as untrustworthy as long as the bank industry associations such as CBA and ABA continue to ignore the predatory behavior of their membership. There is no self-regulation by the banking industry and therefore Dodd-Frank cannot be relaxed.
Posted by frankarauscher | Thursday, March 07 2013 at 11:57AM ET
Consumers in general, not just the underbanked, have flocked to prepaid card because of the control it provides over their finances and this study shows why the cards are particularly useful for the specific challenges faced by underbanked consumers. That is why prepaid cards have been endorsed by numerous consumer groups such as the Center for Financial Services Innovation (CFSI), the National Urban League and La Raza as a way for consumers to enter the financial mainstream. Network Branded Prepaid Card Association (NBPCA) members will continue to work with Regulators to expand the features of these products to meet the needs of the underbanked while ensuring strong consumer protections.

Jennifer Tramontana, NBPCA
Posted by Jen NBPCA | Thursday, March 07 2013 at 10:56AM ET
Good article because it mentions ways that banks can help the un-banked and under-banked. It appears to assume that the pricing is fair and not abusive or predatory. Yet Wells Fargo, US Bank, Regions Bank charge up to 350% for their own payday loans to their own under-banked customers! Some people are poor because they have been financially bled to death by financial gangsters. How can you trust a bank that says it wants to help and then preys upon the least financially stable of their customers.
Posted by frankarauscher | Thursday, March 07 2013 at 10:14AM ET
The first step would be to actually offer a product. I don't believe there is a bank in Massachusetts or Rhode Island that offer any prepaid products.
Posted by Jim Jackson | Wednesday, March 06 2013 at 9:48PM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.