Banks Adopting More Strategies to Court Underbanked

Automation is making it easier and more profitable for financial institutions to provide services to lower-income customers. And offerings such as check cashing and money transfers are enticing the underbanked to form relationships with banks.

Here are 50,000 "unbanked" or "underbanked" people living in San Francisco alone. Individuals in this large market have no checking or savings accounts or formal credit history, and typically rely on alternative credit providers for their financial needs.

To bring members of that group into the financial mainstream, the city launched "Bank on San Francisco," a joint effort among Mayor Gavin Newsom, City Treasurer Jose Cisneros and many of the city's financial institutions. "We wanted to enable low-income folks to be more successful in being able to survive and thrive here in San Francisco," Cisneros explains, noting that the Federal Reserve Bank of San Francisco gathered the city's financial institutions and "asked them to offer appropriate starter accounts at relatively low cost" to the underbanked.

"When someone doesn't have a bank account, they really have no choice but to go to a check casher," Cisneros continues. As a result, they frequently overpay for a service that most Americans receive for free, he adds.

According to Cisneros, many of the area's banks and credit unions -- from the smallest to the largest institutions -- signed on for the program. "We really were excited to see an overwhelming majority of banks in the area agree to participate," he says.

By the one-year mark, the Bank on San Francisco program had succeeded in opening more than 11,000 checking accounts for the city's previously unbanked, Cisneros adds. By press time, that number had gone up to 15,000. And other U.S. cities are looking to adopt similar programs. "We've talked to a number of cities and organizations that are looking into this model," Cisneros says.

But banks' interest in helping the underbanked isn't entirely altruistic. As many as 40 million U.S. households are considered underbanked, according to the Chicago-based Center for Financial Services Innovation (CFSI), a nonprofit affiliate of ShoreBank Corp. that facilitates financial services industry efforts to serve underbanked consumers across the economic, geographic and cultural spectrum. And while the average account or transactions of an underbanked person may not seem substantial, as a group, the underbanked spend at least $13 billion per year on non-bank financial transactions, according to CFSI estimates.

Unfortunately, many of the underbanked have had negative experiences with banks in the past, which contributes to skepticism toward traditional financial institutions. Others, especially immigrants from Latin America living in the United States, have an ingrained mistrust of the establishment in general, according to TowerGroup (Needham, Mass.) senior analyst Jennifer Roth.

Roth is an expert on the "cash-preferred" market, which is synonymous with the underbanked market that prefers to not use traditional banking services. "Cash-preferred consumers' financial transactions consist primarily of cashing paychecks, paying bills, remitting funds to their home countries, topping up prepaid cards or mobile phones, and getting cash for groceries, gas and incidentals," wrote Roth in "Walk-in Bill Payment: The Rational Option for the 'Cash-Preferred' Market," a TowerGroup research note released in February. "It is possible for this consumer segment to be profitable to financial institutions if banks develop products to fit their needs."

But, "There does have to be a buildup of trust," Roth tells BS&T. "A typical bank branch is very formal -- it's not very welcoming."

In contrast, "Check-cashing facilities are not very formal at all," Roth says. There also are a number of activities that can be performed at a typical check-cashing outlet -- including purchasing a prepaid card, sending a remittance or reloading an international calling card -- that aren't always available at the corner bank, she notes.

Then there's the issue of cost. Roth says that the typical cost of a money order at a check-cashing facility is 79 cents, compared to $3 at a bank. In fact, in 2006, check-cashing outlets charged on average 2.44 percent to cash Social Security checks, 4.11 percent to cash paper payroll checks and 8.77 percent to cash personal checks, according to the Consumer Federation of America, a Washington, D.C.-based advocacy and lobbying organization.