Editor's note: A version of this post originally appeared on LinkedIn.
A battle is underway for the pocketbooks of the 68 million unbanked and underbanked adults in the U.S.
In one corner are bankers, stuck in slow- or no-growth markets. They're covetous of any profitable new customers they can scrounge upbut fearful that any moves to profit off the underprivileged will end badly.
In the other corner is the lightly regulated shadow banking system, offering everything from payday and tax-refund anticipation loans to international remittances and rent-to-own financing.
The challenge: The unbanked and underbanked population skews poor and minority. The financial products they use tend to skew expensive and poorly disclosed.
Regulators and consumer advocates have long been aware of this problem, but the advent of the Consumer Financial Protection Bureau has added new impetus to their angst. The dilemma that regulators face is that while, yes, the status quo is abusive, the alternatives could be even worse.
One serious risk is that if regulators nuke banks' own low-income products, or those of shadow banks, the struggling masses will get pushed into the arms of even less reputable characters.
That risk is likely to rise as regulators press ahead with a current clampdown on payday loans, cash remittances, prepaid cards and other products. Payday loans have drawn the most fire recently. In April, federal regulators issued tighter guidelines for banks' own versions, deposit-advance loans. The guidelines will essentially wipe out the products, sold by Wells Fargo (WFC), U.S. Bancorp (USB), Regions Financial (RF) and others, some industry observers say. Loan sharks will soon be dancing in the streets.
There is good news. Innovationdriven by the urge both to do good and do wellmay come to the rescue. The underbanked have become a cause célèbre of the nonprofit set and a growing gaggle of capitalists. At Accion International's Center for Financial Inclusion, the Bill & Melinda Gates Foundation is working with companies including Citigroup (NYSE:C), Visa (NYSE:V), MasterCard (MA) and Western Union (WU) to broaden financial services for and the potential profits from underserved people worldwide.
Jumping into the mix are banking outsiders. Silicon Valley startups are working on alternatives to payday loans, hybrid prepaid bank accounts and mobile phone apps that encourage people to save.
Megaretailer Walmart (WMT), whose clientele closely overlaps with the un- and underbanked population, has forged a number of partnerships to offer banking services via the backdoor, years after bankers fought tooth and nail to block it from obtaining a full-fledged banking charter.
Walmart's highest-profile effort is its joint venture with American Express (AXP): the Bluebird prepaid card, a full-service checking account in drag that has relatively few fees and has helped bring prepaid products into the mainstream. No bank account? No problem. Launched last October, Bluebird by early this year had over 575,000 account holders and $275 million in funds loaded onto the cards.
Walmart is also working with two community development banks, Urban Partnership Bank in Chicago and Urban Trust Bank in Lake Mary, Fla., to bring brick-and-mortar banking to low-income markets.
Despite the regulatory headwinds, bankers are pushing cautiously ahead in the un- and underbanked market, too. JPMorgan Chase (JPM) has split its retail customers into segments based on profitability and other measures, and developed the Liquid prepaid card largely to serve its 8.7 million customer-households with less than $75,000 in annual income. It claims that about half of Liquid's customers previously used few or no banking services.
SunTrust Banks (STI) is teaming up with Operation HOPE to reach the underbanked. That pilot venture involves putting financial counselors in SunTrust branches in a bid to help non-customers improve their finances to the point where they can become traditional banking customers.
Raj Date, until recently the CFPB's No. 2 official, recently told my colleague Maria Aspan that many banks have assumed a "fetal position in the face of mounting criticism of products for low-income customers. Date has set up a financial consultancy Fenway Summer to develop a better short-term loan for low-income customers.
Date sees what he calls "the small-dollar credit problem" as one that banks can largely solve by using better data to provide cheaper loans that are still profitable.
There's no magic potion for providing low-income people with low-cost financial services. But the combination of technology, ingenuity and the capitalist incentive has solved many problems before. How great it would be if they can do it again for the nation's most financially vulnerable and abused citizens.
Neil Weinberg is the editor in chief of American Banker. The views expressed are his own.