3-Year Study IDs What Really Works In Reaching 'Unbanked'

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Credit unions that plan during 2006 to expand services to the underserved need to realize that low-income consumers aren't simply "regular" customers with less money if they wish to succeed in reaching out to this market, according to a three-year study into how to target the "unbanked."

The National Community Investment Fund, in partnership with the Retail Financial Services Initiative and the Center for Financial Services Innovation, has released "From the Margins to the Mainstream: A Guide to Building Products and Strategies for Underbanked Markets."

RFSI is a specially selected group of banks and credit unions that tested a broad spectrum of products and processes to determine how best to reach out to underserved markets.

"Of the many lessons learned through the Retail Financial Services Initiative, arguably the most important was the insight that low- and moderate-income consumers are not simply 'regular customers with less money'," the study concluded. "In reality, they constitute different segments-rural residents, recent Latino immigrants, urban African-Americans, for instance-each with distinctive cultural beliefs, behavior patterns, consumer preferences and barriers to participation in the financial mainstream."

What first focused attention on the unbanked was a law passed during the Clinton administration requiring that all government benefits be delivered electronically, explained Christopher Tan, senior analyst with the Center for Financial Services Innovation. "When they realized there was a whole segment of the population that wasn't able to receive benefits electronically, that's when the term 'unbanked' was coined," Tan related. "That's about the same time that the community development financial institution community realized that their primary lending products-small business loans and mortgages-were good products, but there was a significant number of people who were not ready for those products, yet."

What they needed, Tan noted, was short-term liquidity, but "most CDFIs aren't as strong on the retail side, and their product offerings weren't adequate for this market's short-term liquidity needs."

It was hardly the first time that people looked at the "fringe financial services market," but there was a side of it that had been largely overlooked previously.

Sustainable Business Lines?

"Most look at the unbanked from the demand side of the issue and suggest that if these people understood just how much money they were burning by using these extremely expensive products like payday loans, they would stop using them," Tan offered. "While that may be true, there's a supply side to this, too. We decided to look at that side and ask the question: can we really offer sustainable business lines that address these short-term liquidity needs?"

The answer is "yes"-if the traditional financial services providers are willing to learn about the community and partner with community leaders to create appropriate products and gain instant cachet with the community they seek to serve.

The study featured efforts by a variety of banks and credit unions to serve the underserved, including Alternatives FCU, Bethex FCU, North Side Community FCU, Opportunities CU, SSA Baltimore FCU and Water & Power Community CU.

One of the "pleasant surprises" discovered during the study was how well the partnerships between the financial institutions and the community groups worked.

"We had an inkling that one way to do this is to share the cost (of creating programs for the underserved) with various partners," Tan noted. "That turned out to be the case, but we were surprised at how willing the partners were to share those costs."

On the downside, there are some unexpected costs to be dealt with, as well. "In creating a payday loan alternative, the institutions streamlined underwriting, and origination costs weren't so bad, but the cost of servicing the loan...we didn't anticipate how critical it was to tie these products to direct deposit."

The NCIF and its RFSI institutions now have a new task cut out for them, Tan noted: moving the people they were able to reach out to into other products and services and help them amass wealth.

"The emerging lesson and big challenge now is, we focused on getting these people in the door...now what?" Tan asked. "Now that they're in, are they building their assets and moving on to bigger asset products? Are we helping to move them along the financial path?"

That, Tan said, is likely to be the subject of the next report, which could be out "no earlier than July 2006."

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