There is a particular segment of the underbanked population that every financial institution should focus on. Young adults, defined as anyone between the ages of 18 and 25, represent a valuable segment of potential customers for a couple of reasons.
First, unlike other underbanked consumers, young adults are underbanked simply because they have not previously been old enough to legally enter into a banking relationship. They represent a huge population of potentially profitable, low-risk customers.
Second, for financial institutions looking to build deep, long-term customer relationships, underbanked young adults are a great opportunity. Financial institutions that help young adults open their first financial accounts, establish good financial behaviors, and start building strong credit histories will gain the trust and affection of those consumers and will build the foundations for loyal, long-term relationships.
I recently spoke with a college student about her experiences applying for her first credit card. Her story revealed how far financial institutions still have to go.
This student is going into her junior year of college. She has a part-time job and her monthly salary exceeds her monthly expenses. She has a checking account, a debit card, and a savings account. She has never been late in paying her rent or utility bills. She wants to get a credit card in order to start building a good credit history.
After doing some research on creditcards.com, this college student picked the credit card that she wanted to apply for. The card was from a top-ten U.S. financial institution. The card was designed for and marketed specifically to "students with limited or average credit who want to build credit and get rewarded for it."
Sounds like a perfect fit right? This bank even built an entire micro-website around this product. The website provides definitions of common credit card terms, tips and resources for building a good credit history, and frequently asked questions about the product.
The credit card and the entire experience of researching and applying for the credit card were perfectly optimized to appeal to the underbanked college student population.
The problem is that she was declined.
She submitted her application on the bank's website, waited a few minutes for the bank to process her application, and then got a response message telling her that she was declined. Her immediate reaction was "What? I've been declined? Why?"
It's a good question. She fits the customer profile for the card perfectly. She is a college student looking to get her first credit card and start building her credit history. She fit the same definition of "average credit" that the bank used on its own website. She has the financial capability to meet her credit obligations. So why was she declined?
Her curiosity on this question was not slaked until a week later when her declination letter from the bank arrived in the mail. By then, she had angrily reconciled herself to the fact that she would never have a relationship with this bank because, from her perspective, the bank did not want to have a relationship with her.
According to the declination letter sent by the bank, the reason this college student was declined was because of "missing or unavailable" information from the three traditional credit bureaus. The natural response to this declination reason is "of course the credit files were missing or unavailable, she has never had credit before!"
She assumed that the process used to evaluate applications for this card would be compatible with the type of consumers who the bank was targeting the card to. This turned out to be a false assumption.
Instead of basing their decision on the content of a credit file that they should have known would not exist, the bank could have tailored their decisioning process for this credit card specifically. When they got a no-hit from the bureaus the bank could have taken additional steps to verify the identity and character of the applicant by pulling alternative data based on non-traditional identifying information (driver's license, phone number, etc) and payment history (rent, utilities, etc).
Instead of rejecting the applicant because of her unknown credit risk, the bank could have built safeguards around their final product offer to limit their risk exposure (low credit limit, stringent late fees, etc).
Bottom line, the bank could have taken any number of different steps to keep driving towards an approval. Would these extra steps take more time and cost more money?
Yes, but consider the following. This college student is looking to start building her credit history. She is responsible and fully capable of meeting her financial obligations. She is willing to take any reasonable steps to establish her first credit account. At this point, she is unnecessarily underbanked.
The financial institution that is able to convince her to apply for their credit card and is able to approve her for that credit card, will earn her loyalty and a significant share of her wallet for the long-term. It's a shame that the first bank that was able to convince her to apply for their credit card was unable to close the deal.
Alex Johnson is an online marketing specialist for Zoot Enterprises.
