July 08, 2013

Over the last five years, Americans have struggled to overcome the after-effects of the global recession. Evictions, foreclosures and prolonged unemployment left a certain population of people with very little trust in the American banking system – this group is known as the underbanked. Financial institutions tend to view the underbanked customer base as unfavorable based on the assumption that this population of people have low income and poor credit. However, this isn’t true for the entire unbanked population. Many underbanked customers choose to avoid relying on financial services because of the overdraft fees and interest rates regardless of the services they have access to.

Today the underbanked population has grown to 68 million people, which represents one in five American households. Until recently this group of underserved, cash-preferred customers was isolated from traditional financial services. The underbanked have relied on overpriced, lightly regulated non-banks such as payday lenders, cash cashers and pawn shops. Collectively, the underbanked paid some $78 billion in interest and financial service fees in 2011 alone, a practice that is unsustainable for this low-income demographic. However, this has shifted and alternate financial services companies are working to meet the financial needs of the underbanked by offering financial services that are accessible and affordable. For example, Greendot and netSpend’s prepaid card programs enable their customers to use cards for transactions without the hassle of credit checks, and costs associated with overdraft fees.

The Underbanked Go Mainstream

Many organizations and institutions have been working towards financial inclusion; one of the most well known organizations is the Center for Financial Services Innovation (CFSI). Earlier this month, the CFSI hosted the eighth annual Underbanked Forum. It was at this forum that CEO Jennifer Tescher stated that the underbanked has gone mainstream. The CFSI is a long-standing organization that advocates on behalf of the underbanked population. As a result, CFSI plays an important role in monitoring the services that are being offered to the underbanked.

The underserved population is a sophisticated group that is now the fastest growing demographic adopting both mobile phones and mobile financial services. A recent report by the Federal Reserve indicates that the underbanked customer has adopted mobile payments at a rate that is five percent faster than the rest of the U.S. population. Studies also show that the underbanked population uses mobile banking eight percent more than the rest of the U.S. Their rapid rate of mobile adoption supports the claim that the underbanked population has now become mainstream.

Market Rich In Opportunity

A positive implication of the underbanked market going mainstream is that the industry will produce innovative systems, products and services that will benefit these customers. Developing financial systems that allow these customers to manage their payments easily is where the opportunity exists.

Whenever there is a large market of opportunity, there will be unscrupulous efforts to access and abuse the market. Although the underbanked population is often the target of scams and fraudulent services, the risk of fraud is no greater than the risk of fraud in traditional banking services. Companies entering into this market aim to fully integrate the underbanked into a financial system where they’re reliant on the products and services they’ve introduced. Not unlike any other industry, products and services that aren’t beneficial to the underbanked customer will surface. However, with the help of CFSI and other similar organizations, they will inevitably be filtered out of the market.

The good news is that there is a growing collection of organizations that are working hard to be socially responsible in how they service the underbanked. The CFSI closely monitors the industry and provides assistance and leadership to companies interested in operating in a socially responsible manner and/or meeting well-intentioned industry players. The Consumer Financial Protection Bureau (CFPB) established under the Obama administration, helps educate, inform and enforce fair practices for financial services targeted at consumers.

While government regulation is often frowned upon, the CFPB is working to keep underserved customers safe from predatory practices. These organizations have a mission to bring valuable and safe services to the underbanked and have a strong understanding of the environment. With this in mind, they are able to regulate unscrupulous efforts that enter the market.

Tactics To Reach the Underbanked Consumer

Although the type of product that the underbanked customer has access to is important, the adoption rate is just as critical. Generally speaking, customers are open to a product that offers value beyond what they already have, or offers a service that they didn’t have access to before. Underbanked consumers are no different. They will adopt a product that provides a new and novel, or highly differentiated service. Products that combine the cash-preferred nature of the underbanked with the mobile experience, which this customer is quickly becoming accustomed to, are redefining the financial services offerings for this large and growing market.

Hamed Shahbazi is the CEO ofTIO Networks, which provides payments platforms to service the underbanked population.