Report Urges Banks to Expand Service to Unbanked

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Banks might have more success winning over underbanked consumers if they lowered initial deposit requirements, offered banking services to noncustomers and made more of an effort to let customers know that they offer small-dollar loans, according to a new report from the Federal Deposit Insurance Corp.

In a summary that accompanied a survey on how banks are serving unbanked and underbanked consumers, the FDIC also said banks that are most successful at reaching this group tend to have multi-lingual staff, more off-premise automated teller machines and, in some instances, extended hours on weekdays and weekends.

"Banks that have not deployed certain retail strategies should consider whether adding such options could better position the institution to build relationships with underserved consumers," the FDIC said in the survey's conclusion.

Under a 2005 law, the FDIC is required to survey banks every two years to assess their efforts at bringing consumers who generally avoid banks "into the financial mainstream." The latest survey, taken in late 2011 and early 2012 and released Thursday, is a companion to a survey the FDIC released in October that examined how and where underserved consumers where conducting their financial business. That survey found that the number of unbanked consumers had increased in recent years and that most turned to check cashers, payday lenders and other outlets because they did not believe their income was sufficient to open a bank account.

The FDIC said that minimum requirements for opening an account remain an impediment.

Almost half of all banks required an initial deposit of $100 or more to open a basic checking account, with 6% requiring more than $100 and 42% asking for precisely $100 on accounts without direct deposit. Just under half of banks required $50 or less to open an account.

Most banks accepted nontraditional forms of identification to open accounts, with 58% of banks accepting a non-U.S. passport and 40% taking an ID from a foreign consulate. Almost three-fourths accepted an Individual Tax ID Number as an alternative to a Social Security number.

Nearly two-thirds of banks charged no monthly maintenance fees on basic checking accounts though one in five charged more than $3 per month on accounts without direct deposit. One out of 10 banks charged between $1 and $3.

The survey also found that banks may offer auxiliary products, like check cashing, for existing customers but necessarily not for others. The most commonly offered products to both customers and noncustomers were payroll check cashing, bank or other official checks and money orders.

Domestic and international remittances were offered less frequently to both groups. Only slightly more than 11% of banks offered domestic remittances and 9% of banks offered international remittances to noncustomers.

Eight out of 10 banks offered small unsecured personal loans. Within that group, 43% offered unsecured personal loans with no minimum loan amount and an additional 53% had a minimum requirement of $2,500 or less.

Small dollar loans tended to have repayment terms of 90 days or more with annualized rates of 36% or less. Loan approvals generally took less than 24 hours.

But according to the FDIC, nearly one in five households obtain loans from payday lenders because they did not know that their banks offered small-dollar loans. This "suggests that banks could improve the marketing of these products," the FDIC said.

The FDIC also said that large banks and small banks each have their strengths and weaknesses when it comes to meeting the needs of the underserved.

The top 25 banks, for example, tend to have lower initial deposit requirements and accept a broader range of foreign identification, while small banks are less likely to charge monthly maintenance fees and are more open to making small-dollar loans.

Large banks are also more likely to offer financial literacy training and other educational outreach, the FDIC said.

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