While the final outcome of regulatory reform may be uncertain, one thing is clear: The industry will not regain the trust of Americans without a return to values.
The financial crisis has shifted public opinion dramatically. There is deep skepticism about the financial services industry and the ability of markets to play a positive role in people's lives, and there is strong public pressure for better banking practices.
Values-based banking will be on display next month at the fifth annual Underbanked Financial Services Forum in Miami. The event, presented by my organization and SourceMedia Inc., the parent company of American Banker, highlights the leading innovators and practices in reaching the financially underserved.
As the underbanked market has grown as a result of the financial crisis and the Great Recession, a growing number of financial services companies are stepping up to fill the void with responsive and responsible products and practices.
The result is a tapestry of providers and approaches that could ultimately yield a vibrant marketplace for the underbanked and an improved reputation for the financial services industry. Despite the common wisdom that banks are turning their backs on the underbanked, many are offering new products and policies that could solve some of the most ubiquitous pain points faced by underbanked consumers.
Overdrafts are a major reason consumers have left the banking system. As the new overdraft regulations take effect, banks are rethinking and revising their overdraft policies in ways that could spare struggling customers from racking up big fees. Though free checking may fall by the wayside, it was never really free for liquidity-challenged consumers who were paying through the nose for overdrafts. In addition, banks are experimenting with new small-dollar loan products and savings programs, recognizing that consumers need both credit and savings to ultimately get off the hamster wheel and climb the economic ladder.
Still, banks have a long way to go to keep up with the latest innovations in the underbanked marketplace.
The prepaid debit card industry has matured, and the cards themselves have come to be seen as a legitimate substitute for traditional checking accounts. As prepaid providers add small lines of credit and savings accounts to the cards, they may become substitutes for banks altogether.
Retailers are also making a play for the financial business of the underbanked, moving well beyond check cashing or store credit to offer a range of transactional products and services. They are helping customers build, or rebuild, their credit, and they are turning rewards programs on their heads to give customers opportunities to save.
Community-based nonprofit organizations are developing more effective ways to build the financial capability of their clients, going beyond classroom-based education by linking products with relevant information provided at crucial moments. They are importing global microfinance models and forming partnerships with industry to build pathways to mainstream products.
The government is working to jump-start the underbanked financial services market. The Federal Deposit Insurance Corp. has become the official source of information on the size of the underbanked market through a partnership with the Census Bureau. The Treasury Department is developing a Bank On USA initiative to support local efforts to increase access to financial services.
Innovators and entrepreneurs abound. They are building branches of the future, mobile banking platforms, new payments systems and Web-based financial tools — all with unique application to the underbanked market. How regulatory reform will affect all of this market activity is unclear. But if the goal is to win the trust of skeptical and disaffected consumers, the reforms are only one piece of the equation.
Well-designed regulations can help protect consumers from the harm that markets can do, but they don't do much to create incentives for best practices or to make people feel better about their financial institutions.
Regulations don't rebuild reputations. Values do.
Over the years, the Underbanked Forum has given the underbanked financial services industry the space to grapple with what it means to serve consumers well in the short run and to prepare them for long-term financial success. Products and practices have evolved as a result, and a consensus seems to be emerging about the most crucial elements for serving the underbanked profitably and responsibly.
The industry has enough experience under its belt to begin talking about the values, principles and practices that guide responsible financial services for the underbanked.
Doing so will help cement the legitimacy of the underbanked marketplace and lay the foundation for long-lasting and mutually beneficial relationships with consumers.