Targeting the Unbanked/Underbanked With the Right Solutions

The market for traditional retail banking customers can be likened to a once overflowing well whose water level has been slowly dropping over the years. The volume might level off or even increase for short intervals as banks consolidate and move into new markets and new channels. But this only obscures the possibility that banks might have to find a new source of revenue before the well runs dry.

Fortunately, banks have recognized the situation and now are redoubling their efforts to pursue previously untapped sources of income. And their divining rods are pointed directly at two market segments -- the unbanked and underbanked. To coax these fresh reserves to the surface, banks need to employ a slew of technologies and products at their disposal before someone else jumps their claim.

"KeyBank and other financial institutions realize there is huge market potential for these individuals," says Jeffery Comi, product manager of the Cleveland-based bank's payroll card product, PayWorks. "You're seeing institutions trying to capture this market rather than steal customers away from other banks. It's easier to court [the unbanked/underbanked] than to court other banks' customers." >>

Although numbers seem to vary, according to BearingPoint (McClean, Va.), there are 28 million unbanked and 44.7 million underbanked people in the United States. Together, they represent a potential market of 40 million households with little or no current relationship with a financial institution. Instead, these people tend to frequent alternative financial services providers, such as check cashing facilities and money transfer outlets. In fact, Chicago-based The Center for Financial Services Innovation (CFSI) reports that Americans spend at least $10.9 billion on more than 324 million alternative financial transactions a year. So for banks, there definitely is money to be had in this market segment.

Taking Aim at the Unbanked and Underbanked

Of course, a financial institution has to do a bit of homework before courting the unbanked and underbanked. The challenges are many, ranging from cultural and language barriers to banks' own sometimes inflexible business models. First, banks need to determine just who these people are. "It's a very diverse market," says CFSI research director Katy Jacob.

While the unbanked segment tends to be comprised of minorities and recent immigrants -- often with little money and education -- the underbanked segment is harder to pin down, notes Jennifer Tescher, director of CFSI. The underbanked can consist of educated immigrants, middle-income individuals with bad credit and even military personnel, she relates. But banks should not ignore the unbanked, presuming the underbanked are an easier, more-profitable target, Tescher stresses. "People move in and out of the banking system all the time," she says. "Of the 30 percent of the people in the [BearingPoint] survey who were unbanked, half had a bank account in the past."

So how does a bank hone in on these potential customers? As a fundamental starting point, John Weisel, managing director with Accenture's (Chicago) global banking industry group, suggests banks should take a three-pronged approach. "First, I would look at my existing customers," Weisel explains. "Then I'd go after the employer base [commercial clients]. Finally, I'd use good old-fashioned market analytics to see who exactly is in the community."

Banks' existing customer base can yield a veritable gold mine of information, experts agree. There are plenty of accountholders using only one or two products from their financial institutions. This certainly qualifies them as underbanked, asserts CFSI's Tescher. "These are single-product customers who might not be thought of as very profitable," she says. "Look at your single-product customers and think about them differently," Tescher advises.

Typically, banks might have tried to jettison these customers as unprofitable, or they might simply ignore them. According to an Accenture survey, however, bank customers want their financial institutions to inform them of additional products and services from which they may benefit, but nine in 10 respondents said tellers and telephone service representatives rarely, if ever, inform them of useful bank offerings. Further, only 6 percent said their bank tries "too hard" to up-sell them, compared with 67 percent who said they would like to see a bit more effort to serve them.

Given the untapped opportunity to cross-sell, "Banks need to understand how many of this type of customer they already have," explains James Joaquin, president and CEO of Xoom, a San Francisco-based provider of remittance processing tools for financial institutions. "Customer-profiling technology can show banks who the low-hanging fruit is. For example, you can have a customer from India who has an account with your bank, but he's still doing remittances with Western Union." Once a bank has this knowledge, it then can design a service to entice this customer to consider using the bank for his money transfer needs as well.

Similarly, mining commercial client databases also can provide access to the unbanked/underbanked consumer. Frank D'Angelo, president of Milwaukee-based Metavante's payments solutions group, says that although his company can provide banks with technology to zero in on these consumers, "It's usually the banks' commercial customers who give them access to this segment."

Card-Carrying Consumers

For example, payroll card initiatives -- in which people's pay is loaded onto a card rather than given to them as a check -- provide a ready-made audience for banks, D'Angelo offers. Since it can be considered a value-added service to commercial customers, "This product would be sold more through a bank's treasury services department," D'Angelo adds. "From the financial institution's point of view, it provides stickiness to commercial customers" in addition to creating a relationship with a new customer.

KeyBank ($93 billion in total assets) has been offering a payroll card product for approximately seven years. The PayWorks card is an unbranded payroll debit card that employers can offer to their workers, explains KeyBank's Comi. "We work with the employers to identify their employees who are unbanked," he says. "This is an ideal tool for use by these individuals."

The benefit of payroll cards for employees is that they no longer need to visit check cashing facilities and pay a fee to get their money. They also no longer have to worry about walking around with a wad of cash in their pockets. The payroll card is used like a debit card where the individual spends money as needed, can obtain cash at ATMs or purchase goods. KeyBank's card is PIN-based, like a traditional debit card. The biggest difference is that it is not necessarily tied to an account. For employers, the payroll cards eliminate a good deal of paper processing.

While KeyBank has chosen not to brand the card -- employers "can use [the payroll card] as an extension of the company, not the bank," Comi relates -- banks certainly can place their brand on a card. "We've struggled with that [decision]," explains Comi. "Our thought was that we were taking these unbanked individuals and giving them a kind of bank card, but they may not be ready to go right to a branded bank card in one swoop. We thought they might feel more comfortable [with an unbranded card]."

Comfort level is something banks must keep in mind when dealing with the unbanked/underbanked, stresses Tim Ramsey, senior manager in the payments and transactions fulfillment practice at BearingPoint. A significant portion of the market may not trust banks for one reason or another, he remarks.

Payroll and other cards -- whether they are prepaid, reloadable or gift cards -- are gaining popularity and are an appealing product for banks and the unbanked/underbanked for a variety of reasons, experts note. "There's a higher level of security with a card because you're not walking around with your entire paycheck in your pocket," observes Metavante's D'Angelo. "You also feel confident when you can pull out a piece of plastic to pay for something."

BearingPoint's Ramsey agrees, saying that something as simple as the prestige associated with holding a card is appealing to a segment of the underbanked market. "Looking at this from the immigrant side, many of them don't have confidence in banks, but they do understand MasterCard and Visa," he explains. "There's a prestige factor associated with holding one of these cards."

Cards are not just good introductory financial instruments for underbanked individuals, according to Michael Archer, managing director, regional business leader, with MasterCard Advisors (Purchase, N.Y.). They also help banks mitigate risk, as there are strong controls around cards, he asserts. "You can decide whether to lend to the person and how much credit you want to extend to them; and you can see when the customer uses the card and can decide whether to allow transactions to go through," Archer explains.

Risky Business?

Of course, banks are risk-sensitive by nature, and there is a perception that there is a great deal of risk in servicing this consumer segment. "Banks are at a disadvantage [when serving the unbanked/underbanked] from a risk management perspective," says CFSI's Tescher. "They are held to a higher standard from a regulatory standpoint -- they're programmed to think about risk differently from an alternative financial services provider. For consumers with no credit files or thin files, they'll just get spit out of the system even before the process starts."

"That doesn't mean these would be bad customers, but there's no way to extend credit to them," adds CFSI's Jacob. "So banks are using alternative data to find predictive measures for accessing these consumers."

Credit bureau and information solutions provider Experian (Costa Mesa, Calif.) is working to create a pool of alternative data sources for financial institutions to exploit when seeking the underbanked as customers. "Because there's a huge segment with little or no credit history, we need information to help with risk assessment," explains Laura DeSoto, Experian's SVP, product development and marketing, consumer information unit. "We want to create an alternative consumer report to a credit report to help underserved consumers."

Among the data Experian is considering are utility records, prepaid card histories, lease information, and, for those with a bank account but no lending relationship, demand deposit account or checking account data. Experian is conducting a pilot in the Los Angeles area with banks and credit unions in which they aggregate this information, which is not traditionally reported in its credit profiles, to see if it provides financial institutions with enough of a risk profile on individuals.

"Risk is probably banks' No. 1 concern [around the underbanked]," says DeSoto. "How can they assess this risk? Lenders want to use their current underwriting systems so data can be used in the same stream. Rather than creating a completely separate system, we want to help them create something integrated with what they have."

That is the crux of the matter, according to BearingPoint's Ramsey. With banked customers, it is generally quite easy for banks to manage anti-money laundering and know-your-customer issues. With the unbanked/underbanked, however, "A lot of these folks want to stay under the radar," Ramsey says. "If I can't completely know my customers, how can I be comfortable going after them?"

Xoom's Joaquin, however, thinks the hyper risk aversion among banks toward the underbanked is somewhat unnecessary. "They're a low-risk customer because they operate in a cash-only environment," he contends. "You receive cash for the transaction so there's little chance of fraud."

Put in the proper perspective, there indeed are some elements that make the underbanked somewhat of a lower risk than traditional customers. "Losses are minimal if they're handled properly," opines Accenture's Weisel. "The transactions are smaller, and you're dealing with cash or stored value cards where the funds have already been collected. I think the risk is manageable for banks."

With regard to payments risk, he adds, it all depends on how well the bank can verify the customers. "That's why I like the employer angle so much," Weisel relates.

Working through employers could very well be why KeyBank has had few problems with fraud in its payroll card program. "We haven't seen huge losses associated with the unbanked or underbanked population," states KeyBank's Theodore Gerbick, product manager, card services, in the bank's global treasury management division. "If you strip out the people with credit problems, the demographics are no different from other customers. However, I think the industry is going to have to embrace alternative data to go after those with no credit history."

There is no denying that the underbanked consumer is a different animal from the banked consumer, in spite of any similarities. "The risk profile does change a bit," says MasterCard's Archer. "The method of income is not as stable or predictable so banks need a way to minimize that. Banks need to change their risk models and thresholds when extending any kind of products to the underbanked. They have to adjust the processes and protocols of their existing systems to deal with these people."

Unique Technology Requirements?

But BearingPoint's Ramsey points out that banks' existing systems may not be able to handle the unbanked/underbanked consumer. "A lot of the technology at traditional banks is not necessarily the technology required to serve this segment," he explains. "They can't leverage their existing infrastructure easily. There's a unique group of technology required to serve this market."

Although bank tech vendors are introducing new products that address the needs of the unbanked/underbanked, CFSI's Tescher adds, current banking technology does not facilitate the kinds of services the underbanked require, such as check cashing. "Everything the bank does revolves around the notion of the account," she says. "Banks need to remember that these people don't always want a checking account. They have to switch their internal cross-sell systems so that checking accounts aren't the only products that can be cross-sold to this segment." The last thing banks should do is force these people to become accountholders, Tescher asserts.

Still, banks' advanced technology capabilities -- as well as the breadth of services and products they offer and the reach of their distribution networks -- may give banks an edge in courting the unbanked and underbanked, says Accenture's Weisel. "They have the technological capabilities and products to offer more to this segment than other players," he asserts.

"The ability of a bank to aggregate, collect, house and analyze large amounts of data within data warehouses provides banks with a huge opportunity in this market from a technology standpoint," relates MasterCard's Archer. "Versus a low-tech organization, the one with the database wins in the long run." **