Media outlets have drawn attention to it and bankers are definitely aware of its importance. Between the fee-reducing impact of the Dodd-Frank Act and the newly introduced "Opt-In" provision within Regulation E, many banks are facing a massive reduction in revenue that for the past 20 years was largely derived from overdraft fees. At some superregional banks NSF/OD fees represented upwards of 80 percent of total non-interest income. Bankers now fear that additional legislative mandates could amount to further reductions in this $38 billion revenue stream.
Interestingly, there is a growing, untapped consumer segment that has the potential to create a new and profitable source of income that most banks till now have ignored. CAST Management Consultants estimates the underbanked/unbanked, also referred to as the "underserved," currently generate fee income of more than $10 billion annually, with the banking industry only realizing a very small percentage of this high-margin income. So why then aren't the banks moving more aggressively to tap into this pot of gold?
The underserved market, which is comprised of roughly 40 million households and more than 100 million consumers, has historically not used typical banking products and services, so many banks have no experience with this segment and, therefore, don't understand their buying behaviors or ultimately what products will satisfy their needs. Studies from the FDIC and the Center for Financial Services Innovation show that more than 20 percent of banks' existing customer base regularly use alternative financial services (AFS), and that is only likely to increase as banks scale back or eliminate many basic services. It is only in recent years that banks have taken notice of the underserved market, and that is largely driven by the success of non-bank providers like Walmart, CVS, GreenDot and NetSpend. All of these providers have introduced an array of financial products targeted to the underserved that essentially eliminate the need for a banking relationship.
So you may ask yourself, why haven't the banks courted these consumers? Based on CAST's research and client work, we believe one of the main reasons banks have neglected the underserved market is the widespread perception they are "unbankable." In other words, many bankers think these consumers are not creditworthy, do not have enough income to pay for or need financial services beyond a basic checking account, or will not be loyal. Compounding this perception is the belief that the "un"banked, who conduct all of their financial servicing completely outside the traditional banking ecosystem, are unattainable.
Unfortunately, these perceptions couldn't be further from the truth and, in fact, studies show that as many as 25 percent of consumers in the underserved segment have a prime credit score, and 27 percent of them have a household income that exceeds $50,000 per year. Interestingly, one of the fastest-growing and potentially most attractive demographics within this segment is the 18- to 24-year-olds -- or what is more commonly referred to as Gen Z.
We believe the time is now for banks to act. Today's technology enables banks to develop products and services that are more efficient, electronic, and easily integrated into media technologies such as the internet, text messaging, MP3 players and mobile phones. All of these delivery channels resonate with the underserved market, especially the unbanked, because of the ubiquitous nature of mobile and online technology. In fact, the online channel is the fastest-growing delivery model for AFS providers because it provides 24x7 convenience and a level of privacy and anonymity. CAST is working with several banks that are launching suites of products that include prepaid debit cards, electronic bill pay, wire transfer services, non-customer check-cashing services, low- and no-cost money orders and small-dollar loans. This product mix, while fundamentally addressing the financial needs of the underserved, leverages much of what the banks offer today -- but customized to the needs of this niche consumer base.
It is imperative the banking industry start to look at the underserved market through a new and unfiltered lens. The proliferation of non-bank models suggests if the product mix is right, loyalty reigns supreme and revenue flows thereafter -- and right now that is a very compelling proposition for any banker.
Jack Leach is Managing Principal, EVP, CAST Management Consultants, Inc., a boutique firm dedicated to providing strategic consulting services to the financial services industry.