The year is shaping up to be a tough one for bankers, but how will the subprime mortgage meltdown and the resulting downturn affect the way banks work with the underbanked?
That depends in part on how banks go about battening down the hatches. The unfolding economic crisis warrants caution, but it would be a mistake to lose sight of new opportunities.
Underbanked consumers may represent one of the few groups that can provide banks a haven during the storm and position them for growth once it has passed.
Though low- and moderate-income borrowers have been disproportionately affected by the subprime mortgage crisis, the underbanked as a whole are less likely to be caught up in it, as they tend to have household incomes below $50,000 and are more likely to have a thin credit history or none at all. Subprime borrowers generally had credit histories — just bad ones.
A national consumer survey conducted in late 2006 by Synergistics Research Corp. confirms this. The survey showed that only 12% of unbanked respondents and 20% of underbanked respondents had a mortgage.
In a comparison group of banked consumers, just over a quarter of the respondents had one. Those surveyed had a household income of $40,000 or less.
What underbanked consumers need in the short term — access to well-priced, well-structured payment and savings products and services — won't change much in the face of an economic downturn. Those who do face hardship will be even more likely to need these things.
By meeting their needs creatively, financial services companies can nab a combination of fee income and low-cost deposits. Firms that step up now will get a head start on rebuilding responsible pipelines for consumer loans and mortgages. Credit crunches do eventually come to an end.
Bankers' efforts will be buoyed by the growing breadth and depth of tools designed to find and assess underbanked consumers who are not in traditional databases.
A growing number of banks began testing some new analytical tools last year. How these efforts will fare is difficult to predict. Some banks will continue to use the tools, realizing that they may be the key to finding the next generation of good bets. But there are bound to be banks that cannot find a way to keep testing and learning as their credit standards continue to tighten.
In this environment, retailers and other nonbanks are probably best poised to leverage the inroads they have made with the underbanked. Wal-Mart's rollout last year of its prepaid debit MoneyCard and hundreds of money centers in its stores could not have been timed better.
The same can be said for a line of credit introduced late last year by H&R Block for holders of its Emerald Card. More than 2 million customers signed up for the prepaid debit card during the last tax season. In addition to the new credit feature, the company has linked an interest-bearing savings account to the card.
But don't count banks out yet. The subprime mess is not likely to engender much good will among consumers who already lacks trust in banks. However, banks that have been laying the groundwork with the underbanked during good times are best positioned to leverage their investment now.
KeyBank, for instance, has logged more than three years of commitment to the underbanked market with the introduction of check-cashing services and a growing suite of transitional products.
The effort started in largely lower-income African-American neighborhoods in Cleveland, where the bank had stopped paying much attention. Regaining trust among consumers who felt like they had been given the cold shoulder was a long struggle that went beyond the new offer to cash checks.
The strategy involved new marketing messages, redesigned branches, staff training, and persistence — and it paid off. The bank expanded KeyBank Plus first in Cleveland and then to other markets across the country.
Cleveland is struggling mightily in the face of a recession, and it has one of the highest foreclosure rates in the country.
KeyBank, like all banks today, is facing challenges, but its underbanked business is a bright spot, with both new customers and repeat business continuing to grow.
When the dust settles, underbanked consumers will remember who stuck with them when times were tough.
