The financial services landscape has changed dramatically in the last decade, and understanding the changes is critical to building underbanked initiatives.
It's not just about banks anymore. As consumers, we now access financial services from a dizzying array of providers and channels. The underbanked should have the opportunity to make the same kinds of choices.
The upcoming Underbanked Financial Services Forum is a microcosm of the more diverse financial services industry. The conference, produced by my organization and SourceMedia Inc., the parent company of American Banker, is the only national forum for learning and dialogue among bankers, check cashers, technologists, entrepreneurs, retailers, and regulators.
Dialogue that cuts across traditional industry lines is critical. Better information about the underbanked and healthy competition from new players are spurring bankers to innovate. They have an important role to play, whether by delivering products directly or building products for others to distribute.
Bankers offer consumers three key advantages over their competitors. They offer a higher level of consumer protection, they can help consumers build credit, and they offer consumers the chance to save small sums.
But these advantages are slipping away in the face of innovation and competition. For instance, a growing number of providers are developing ways to help consumers build credit from their rental history, bill payments, and remittance patterns.
Likewise, helping people save small amounts of money is getting renewed attention, whether through retail-distributed savings bonds or accounts that reward saving with prizes in addition to interest.
Checking accounts tend to get all of the attention when it comes to "banking the unbanked." But the checking account is not necessarily the best entry product for an underbanked consumer, and the bank is not always the best front door, given where the consumers are coming from, both physically and psychologically.
High fixed costs and legacy technology systems make checking accounts inflexible, overly complicated, and expensive to offer to low-balance customers. Like any product, they work well only if those who open them actually use them advantageously for the provider.
Rather than fixate on banks and the traditional checking account, we should be developing best-in-class products that incorporate the best of what the larger market has to offer.
What does best-in-class look like? It certainly should include banks' advantages in areas like consumer protection, building credit, and savings.
In addition, products should form a pathway for consumers. Well-priced check cashing and bill payment services are fine in the short term; adding savings and credit-building features would help consumers achieve financial stability and prepare them for other opportunities.
Best-in-class means product education should extend beyond the disclosure statement. Consumers need just-in-time information about how their products work — not years before they own them, and not days after getting dinged by a fee they could have avoided with an electronic prompt from their provider.
Finally, consumers need a cushion when they make mistakes or when crises hit. Too often they get the boot in the form of an account closure.
This downward spiral leads to churning that is beneficial to no one. Rather, we need products that, like personal computers, automatically convert to "safe mode" when a problem is detected, so the long-term relationship between customer and institution can be preserved.
Best-in-class products and strategies are good for the consumer, but they are also good for business. They increase customer satisfaction, reduce service costs, and engender loyalty.
They set consumers up to be financially successful, which should be a boon to financial services businesses.
Examples of these best-in-class attributes are slowly blooming throughout the industry, sometimes where you might least expect them. We need to harness positive innovation wherever it occurs.
Product design standards can be powerful tools, especially for curtailing bad practices. But products are only one element of a successful strategy. How those products are marketed, delivered, underwritten, and managed are just as critical.
Establishing new markets for underserved consumers requires new business models that are simultaneously responsible, profitable, scalable, and responsive to consumers' needs and desires.
Until the financial services industry develops these comprehensive models and embraces nontraditional approaches, initiatives to "bank the unbanked" will remain feel-good efforts when they could be so much more.
