American Banker recently ran a thought provoking column by Jennifer Tescher, president and chief executive of the Center for Financial Services Innovation, in which she reflected upon the takeaways from the recent Underbanked Financial Services Forum in San Francisco.
Based upon my 30-plus years of experience in financial services, I believe Tescher is right on a number of observations including the fact that "the 'underbanked' language is hindering the industry's ability to paint an accurate picture of the market opportunity and the range of potential solutions." The problem is that the traditional banking model is perceived as the gold standard thereby any departure from that structure is considered inferior. Given the potential for innovation and technological advances in the financial services market, I would argue that a new paradigm is warranted.
That is among the key findings of "Serving Consumers' Needs for Loans in the 21st Century," a report in which I make the case for alternative financial services as a new banking model for low- to-moderate-income consumers marginalized by traditional banks.
Far from an attack on banks, the paper demonstrates that extending credit, in particular consumer loans under $5,000, is unprofitable due to the industry's legacy cost structure and slow adoption of new technologies. Coupled with federal regulatory compliance requirements, there is little chance that banks can focus on anyone other than the most profitable customer segment.
In fact, a 2009 FDIC survey found that while 73% of banks were aware of the unbanked and underbanked populations in their market, less than 18% identified expanding services to these consumers as a priority in their business strategy.
Tescher correctly points out that small-dollar credit continues to be a hot button issue and that the products filling the space, offered by venture capital-backed start-ups, are considered controversial. Without question further dialogue is necessary about what makes for a high-quality credit product, as she suggests, but the larger issue is why alternative providers are considered provocateurs.
While it is human nature to doubt, Benjamin Franklin, a proponent of colonial scrip or paper money, is quoted as saying, "Without continual growth and progress, such words as improvement, achievement, and success have no meaning." Alternative financial services represent market evolution, and efforts should focus on pursuing a sound federal regulatory environment that would foster growth especially in the unsecured credit space.
Currently, AFS providers must contend with regulatory variations in 50 states that naturally inhibit the ability to offer the types of high-quality products that Tescher believes are necessary to meet increasing consumer demand. At the moment, many AFS providers are left to narrowly focus on just a few products that may or may not serve a consumer's financial obligations. As I have said in the past, these inconsistencies in AFS regulations create a patchwork of credit products that may be unavailable to one of two theoretically identical consumers separated by nothing more than a state line. Studies of the impact of restrictive regulation at a local or regional level repeatedly show these regulations limit options and increase costs to the consumer.
Finally, I concur with Tescher that the need for credit is clear. How to get there lies in the genius of AFS innovators which, unfettered by a yet-to-be implemented progressive federal regulatory environment, can fill a growing unsecured credit void and in the process remove the stigma attached to a quarter of the U.S. population.
G. Michael Flores is the CEO of Bretton Woods, Inc., a consulting firm in St. Simons, Ga. He has taught at the Pacific Coast Banking School at the University of Washington and at the University of Wisconsin.