Financial Inclusion Will Make Big Strides in 2015
Banks are transforming branches, rolling out new products and experimenting with alternative data, in an effort to bring more people into the financial mainstream. Such initiatives might have been a footnote in the past, but they have grown into a serious business strategy lately.
The new American Express film Spent offers an opportunity to consider some emerging strategies aimed at helping low-income and struggling middle-class Americans avoid or get out of debt.
More banks are competing for underserved customers and working to understand millennials as a group that's full of potential, according to speakers at a recent American Banker conference.
While the Federal Deposit Insurance Corp.'s reporting of growing use of prepaid products among the underserved stokes concerns about high costs, some note they can be a bridge to more traditional accounts.
For the estimated 68 million Americans who lack the security of a checking account, 2015 looks to be a promising year.
A recent survey by the Federal Deposit Insurance Corp. identified a slight decrease in the number of unbanked and underbanked Americans in 2013. While this change could be attributed to the strengthening economy, better financial products and increased access to those products are undoubtedly having an impact. Here are a few of the positive trends that will take further root in the coming months.
Better-designed checking account products. National and regional banks are making great strides creating safe and affordable products for consumers with lower incomes. The FDIC's consistent call for safe accounts with transparent rates and fees has clearly encouraged product innovation.
Many new accounts offer services that unbanked consumers have traditionally been unable to access. For example, KeyBank's "Hassle-Free Account" is a "checkless checking account" that offers a debit card but no checks, monthly fees or overdrafts. Bank of America's "Safe Balance" account and Citibank's "Access Account" offer customers a similarly affordable way to conduct routine financial transactions.
In addition, banks and credit unions are increasingly adopting "second chance accounts," designed to give people with negative credit or banking histories another shot at participating in the financial mainstream. These options are open to people who do not qualify for standard bank accounts and often come with low fees and no ability to overdraft; they typically allow borrowers to graduate to regular accounts after a given period.
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Consumer-friendly prepaid cards. Several major financial institutions are moving into the explosive prepaid card market. Once primarily high-cost and predatory, prepaid card-based products are now mirroring checking account features and increasing their market share quickly and safely.
Major financial institutions such as JPMorgan Chase, American Express and Visa have made diverse plays into this market. These mainstream prepaid cards increasingly come with low monthly fees, no automatic overdraft and free ATM and teller access, as well as features such as linked-savings products. These basic products offer the convenience that many customers seek from alternative financial services like check cashers while introducing them to financial products that lead to increased financial security. The Consumer Financial Protection Bureau's recently proposed disclosures for prepaid cards will further help consumers make sense of different products' features and costs.
Removing barriers to access. Reforms are underway that could spell relief for the significant number of people who have been blocked from the financial mainstream because of their troubled banking histories. Many consumers have been mistakenly blacklisted because of errors made by consumer reporting agencies, while others have made only minor mistakes but are unsure of how to fix their past banking problems.
The CFPB recently held a public forum concerning consumer reporting agencies like ChexSystems and unearthed widespread dissatisfaction, even among banks that use these agencies as a tool to assess risk. The agency's leadership in this area could lead to more consistent, transparent standards, better disclosure for consumers and a more accurate approach to assessing risk. Meanwhile, it is encouraging that major players are increasingly limiting their reliance on these imperfect risk assessment models.
Connecting consumers to products. People who have recently transitioned into banking services frequently do so because they have started a new job, according to the FDIC survey. In other words, pivotal life moments like a first job can be an opportune time to help lower-income consumers access affordable checking accounts. Through initiatives like the Cities for Financial Empowerment Fund's Bank On 2.0, local governments are integrating access to financial products through existing social services like workforce development and youth employment programs. This trend will continue to grow as governments look to more efficiently use limited social service funding.
These are encouraging trends in the effort to increase financial inclusion. Most promisingly, these developments demonstrate that financial institutions, the government and nonprofit organizations are all coming together to focus on a market that has too long been undervalued, underserved and in need.
Jonathan Mintz is president and chief executive of the Cities for Financial Empowerment Fund.