March | 2015
Research Paper Banking on the Underbanked Finding growth at the bottom of the pyramid Think Blink At Shikatani Lacroix, we design compelling at-purchase moments that connect in the blink of an eye. Our philosophy and strategic design approach, Think Blink, is driven by a consumer’s motivation to make a purchase decision. Everything we do is geared to owning the “at-purchase” moment. Our firm has a well-earned reputation for designing integrated brand experiences that effectively connect brands with consumers to drive measurable results for clients.
About the author Jean-Pierre Lacroix, R.G.D., President and Founder of Shikatani Lacroix Jean-Pierre (JP) Lacroix provides leadership and direction to his firm, which was founded in 1990. He has spent the last 30 years helping organizations better connect their brands with consumers in ways that impact the overall performance of their business. In 1990, Mr. Lacroix was the first to coin and trademark the term “The Blink Factor”, which today is a cornerstone principle of how brands succeed in the marketplace. JP has authored several papers, has been quoted in numerous branding and design articles, and in 2001 he co-authored the book “The Business of Graphic Design” which has sold over 10,000 copies. JP can be reached at [email protected] and you can follow his thought leadership webinars at: www.sld.com/finance
Other Articles and Book Organizational brand coherence, 2013 Design visualization, 2013 Beyond the middle: Creating value for private label brands, 2012 Retail trends in banking, 2012 Packaging in an online world, 2011 Belonging Experiences: Designing Engaged Brands, 2010
2 | Banking on the Underbanked | March 2015 Introduction The industry is recovering from one of the greatest depressions in • 45.9 % of unbanked households in our lifetime with a near collapse of the banking system. The 2013 were previously banked. renewed optimism is fuelled by higher level of consumer confidence with 257,000 jobs added in January 2015. As the economy continues to gain steam, financial institutions are focused • 57.5 % of unbanked households again on driving growth as a vehicle to increase shareholder value reported not having enough money and market share. A key area of renewed interest is the to keep an account or meet a “underbanked” sector of the population that, based on a 2013 FDIC report, represents 20.0% (24.8 million) of U.S. households. minimum balance as one reason This group is defined as having a bank account but also uses they did not have an account. alternative financial services (AFS) outside of the banking system and represents approximately 50.9 million adults and 16.6 million children. • 34.2 % unbanked households
reported their dislike of or distrust The FDIC report noted the highest underbanked rates continued to in banks as one reason they were be found among non-Asian minorities, lower-income households, unbanked. younger households, and unemployed households. According to a new survey by KPMG LLP, about 23% of bankers polled say so- called underbanked customers offer the greatest growth • 30.8 % reported high or opportunity for their bank. KPMG study also identified that the unpredictable account fees as one underbanked segment goes beyond low-income customers to reason they did not have accounts. include high school and college students or recent graduates. However, the survey also shows that 32% of bank executives believe that asset and wealth management, a less capital-intensive FDIC 2013 Report areas of banks' businesses favored by some banking regulators, will be the top growth driver for their banks over the next one to three years. With all of this interest in wealth management targeting the affluent baby boomers who are nearing retirement, banks are missing out on providing services and offerings to the underbanked, a growing segment of the population that tend to demonstrate a higher degree of loyalty to financial institutions.
Our 35 years experience in the banking industry supports the belief that this customer segment provide a viable growth opportunity for retail banks given the competitive nature of the industry. The following pages outline a range of strategies financial institutions may want to consider as they explore growth strategies in 2015 and beyond.
3 | Banking on the Underbanked | March 2015 Unbanked: Consumers without a Opportunity checking or savings account at a Since the underbanked is representative of a wide demographic bank or credit union and rely and psychographic spectrum of the U.S. population, banks can entirely on the use of cash and non leverage existing transactional tools and digital initiatives, in traditional banking services. addition to leveraging their physical channel networks. The importance of underbanked consumers is not limited to only banks. Walmart and other retailers, in addition to credit card Underbanked: Consumers who organizations, have identified this group as a viable opportunity have limited access to conventional for growth by launching unique and differentiated offerings. banking services and products. Walmart and Kroger offer low-cost check cashing services while They use a combination of American Express, through their Bluebird prepaid card, provide underbanked with access to much-needed cash while not having traditional bank products and non to rely on conventional banking services. banking services such as cheque cashing and payday loans. Since this segment of the market tends to pay higher service fees and tends to be ignored by most banks they are vulnerable revenue to disruptive online startups to fill this gap. With this shift Fully-Banked: Consumers with all there is a sizeable long term risk for banks who are ignoring this major types of banking products; segment. It is important to note the greater percentage of the deposit/checking, credit/debit cards, underbanked are Generation X and Y entering the workforce and looking at building a relationship with a financial institution, with loans, savings and tend to be the more than 35% of underbanked cited their interest in opening a focus of most banking marketing bank account in the future. The question banks need to be asking initiatives. themselves in the event they are overlooking this opportunity is, “Will the current underbanked consumers build credit worthiness and equity that would provide future revenues that are at risk to be Alternative Financial Services: disrupted by new and emerging businesses?” Some of the leading Non-bank products and services financial institutions and retailers have identified significant risks in consisting of higher cost most ignoring this segment as they start earning wages and building equity. Disruptive alternatives have the potential of weakening the predominantly consisting of fee- future generation of banking customers by offering them lower based check cashing, money cost alternatives to conventional services and becoming surrogate orders and payday loans. alternatives.
Source: FDIC: National Survey of Unbanked and Underbanked Not all is lost as banks can provide a range of solutions for the Households, September 2012 underbanked that build a strong foundation for long term profitable relationships before and after they start building wealth and equity.
4 | Banking on the Underbanked | March 2015 For the purpose of this paper, I have outlined these opportunities around our three levers of transformation, namely process, structure and message. In the following pages I have listed ideas worth considering.
Process
The first lever for transformation change based on years of looking at how brands can better align with customers needs is “Process”. This lever represents the steps or path-to-purchase dynamics that can drive profitable growth for financial institutions considering marketing services to the underbanked. I have listed a range of ideas to be considered that take into consideration processes.
Mobile/Online: Generation X and Y have the highest usage of online and mobile services and the advent of digital wallets provides a new opportunity to cater to this group. Furthermore, based on the FDIC report, more than 55% of underbanked consumers use online banking with 33% noting this is their primary method of banking.
5 | Banking on the Underbanked | March 2015 Understanding the growth of mobile banking and digital wallets, to which underbanked are late to the party with only 23% using this channel to manage their banking needs, banks should be creating branded platforms that cater to their needs such as access to mobile-based prepaid services. The real risk for banks is the rapid growth of alternative forms of cash that are becoming mainstream and may undermine the legitimacy and relevancy of banks. Providing a mobile and online solution will provide an offensive strategy to ensure new banking and cash management behaviours remain the realm of financial institutions.
Branches: Access to cash, especially for the older underbanked consumers, provides a platform for branches to build relationships, while financial institutions will need to entice Gen X and Y to visit retail branches including opening new accounts and other services. More than 78% of underbanked used tellers to access their accounts with 32% citing this was their primary method of accessing cash. The branches can play an important role in providing the underbanked with guidance and advice including seminars on how to gain control of their financial lives. In addition, physical environments provide a strong platform in building relationships with the younger underbanked consumers who are looking at establishing their credit worthiness. Since the majority of the underbanked have never had a checking or savings account, they have limited experience in banking and ineffective financial planning.
Video ATM: With the rapid growth of Video ATMs and underbanked consumers’ reliance on conventional ATMs (69%), there exists an opportunity to drive more transactions to this form of banking, reducing the cost of transaction. TD Bank’s recent study found 71% of the unbanked use cash for daily purchases, compared with 30% of the overall population. ATMs are a great platform to ensure this segment has access to cash. In addition, the growth of video ATMs also overcome the challenge of adequate customer ID that was cited in the FDIC report as impacting 17% of underbanked consumers.
6 | Banking on the Underbanked | March 2015 Video ATMs provide a strong platform to provide access to virtual bankers during after hours of conventional banking, as a greater percentage of underbanked consumers have multiple jobs and long working hours. The new video ATM platform provides more than 90% of conventional teller services.
Structure
Structure is the second lever for change through identifying potential product portfolio or service offerings that caters to the underbanked segment of the population, while minimizing risks for financial institutions.
Portfolio: Banks have an opportunity to develop products that cater to the underbanked such as unique prepaid cards or debit cards that provide this segment of customers with the ability to build their credit worthiness. These new products will need to find the balance between opportunity without violating the ever- growing watchful eye of Consumer Financial Protection Bureau regulations. Banks can take a leadership role ahead of regulators’ criticism regarding current deposit-advance loans, remittances, prepaid cards and overdraft services. For example, JPMorgan Chase had launched their Liquid prepaid card largely to serve its 8.7 million customer households with less than $75,000 in annual income.
Business Model: Social responsibility is a critical foundation to how banks market themselves. Research has shown how providing easier and cost-effective access to cash and banking to the poorer segment of the population impacts crime reduction. Banks may want to rethink their philanthropic initiatives to create not-for- profit foundations with a primary focus on meeting the emotional and physical financial needs of the underbanked and unbanked consumers.
7 | Banking on the Underbanked | March 2015 Financial institutions need to assess the benefits of meeting these needs as part of their contribution to society and the community while alleviating regulatory oversight on how these segments are served. I believe the development of such initiatives provide a win- win strategy for both banks, regulatory bodies and the consumer markets.
Message
Message is the last of the three levers for change and is primarily focused on communication and branding elements that most effectively engage the underbanked.
Transparency: A key complaint by the underbanked segment is the cost of hidden fees and charges for accessing cash. Banks can do a better job of communicating to this segment the various risks and also better cash management solutions that would deliver lower costs. Providing transparency is a pivotal factor for banks in developing trust within the community and goes a long way in instilling confidence in their ability to be trusted with all members of the community’s investments and financial equity.
Branding: Building on the portfolio concept, there exists for retail banks to provide branded services and products that instill a sense of dignity and confidence for the plight of underbanked consumers. Product and service branding should leverage the inherent benefits and lifestyle aspirational values of this segment, allowing them to feel part of the community versus victims at the mercy of financial institutions. It was interesting to note the second largest reason the underbanked did not have a banking account was lack of trust with banks at large (34%) while an additional 10% identified the reason they did not have a bank account was the fact that banks did not offer needed products or services.
8 | Banking on the Underbanked | March 2015 Conclusion The underbanked provide a significant opportunity for banks to gain market share and build brand loyalty. However, to appeal to this segment that is already disenfranchised by financial institutions, it will require unique products that provide them with control as part of their financial life delivered through branded programs that leverage transparency as the core value.
Reference Federal Deposit Insurance, National Survey of Unbanked and Underbanked Households, (October 2014);
Yeung, L.H., Shamsuddin, S., Thompson, J.P. Ph.D., The technology to advance equal financial opportunity (2014), Community Strategy Lab;
Aspan, M, Four crucial questions about banking the underbanked (2015), American Banker Magazine;
Holland, K, How the unbanked manage their money (2014), Personal Finance, CNBC;
Chaudhuri, S, Lenders target ‘underbanked’ customers (2014), The Wall Street Journal;
Drees, S, The underbanked maket: a new frontier for retail bank growth (2014), Acxiom Point of View.
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