The best growth market for banks appears to be the market with little to no relationship with a bank at all. A recent KPMG study characterizes the underserved -- comprising the unbanked (consumers lacking a transaction account) and the underbanked (those lacking incremental-credit access) -- as a barely tapped market representing more than $1 trillion in income.
"As banks transform their business models to address a new marketplace, they need to examine the potential of the underserved market," says Carl Carande, national account leader of KPMG's Banking and Finance practice. "New revenue streams are necessary due to increasing compliance costs and various fees coming under pressure as a result of regulatory reform."
KPMG defines the underserved market as including recent immigrants, hourly workers, recent graduates, and higher-income consumers who are suffering an event such as job loss, bankruptcy or foreclosure. But not everyone in this segment, which could reach 6 million people within the next two years, is a casualty of the economy.
"This is less about the recession than it is about customers increasingly choosing non-traditional banking services, such as prepaid cards from Wal-Mart," says Rachel Schneider, vice president of innovation and research at the Center for Financial Services Innovation (CFSI), a Chicago-based nonprofit financial services consultancy focused on the underserved. "Many people are also looking for emergency lines of credit, and most banks and credit unions are currently not offering those kinds of products."
Capitalizing on Existing Customers
However, tapping into that trillion-dollar market isn't as simple as hoisting a flag that reads "Welcome, Underserved!" atop every branch. According to Schneider, "a bank first has to figure out what the underserved segment looks like in regard to its own footprint." In the process, banks are likely to discover that some of their existing customers already are using the non-traditional services favored by the underserved.
"A bank should determine to what extent its existing customers are using non-traditional banking services," Schneider says. It may seem counterintuitive for existing customers to go elsewhere for money orders, money transfers and check cashing, she notes, but "they are likely motivated by convenience and speed. Maybe it takes too long for the bank to clear that check, or the bank's locations and hours don't work for certain people."
Beyond Direct Deposit
The KPMG study, which used state and federal statistics and qualitative research data combined with consumer focus groups and market-sizing computation and analysis, highlights several kinds of products and services that banks could provide to the underserved market. These include international wire/card transfers, check cashing (for non-customers), walk-in bill pay, personal transfers, secured credit cards, courtesy advances, and general-purpose reloadable cards.
Technology will be central to developing and supporting these kinds of offerings, and mobile is likely to be at the forefront of banks' strategies. "The underserved are already using mobile devices for non-traditional services that banks can provide," says SFSI's Schneider, noting that mobile technology can provide features such as low-balance text alerts for prepaid cards.
As for the credit risk assessment and management aspects of serving the underbanked, banks that pursue this market ultimately must combine high-tech with common sense. "The right product for the underserved means something that's sustainable both for the customer and the institution," Schneider says.
According to KPMG's Carande, risk management, which includes the appropriate business intelligence solutions, requires an early-and-often strategy that has to be folded into an overall plan to court the underserved. "Risk management is a key element of the early opportunity-assessment phase, as banks review their current state and design a portfolio of business opportunities for both the near-term and short-term," he says. "From there, it's a matter of creating a target operating model before moving to the end game of deploying a multi-generational plan."