Kill The Unbanked

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It’s time to kill the Unbanked. The label, not the people.

A [email protected] post titled A Question of Value: Bringing Banks to the Unbanked contains a number of statements that bear a closer degree of scrutiny.

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[email protected]: “One quarter of all Americans households are not maximizing their banks’ services — or going to a bank at all — choosing instead to use such substitutes as check cashers, payday lenders and refund anticipation loans. [T]hese 34 million households are ostensibly on the radar of banks that could gain them as customers.”

My take: First off, if “these 34 million households are on the radar of banks that could gain them as customers,” then how could they be “not maximizing their banks’ services” if they don’t do business with banks? Second, why is it assumed that a customer who uses an alternative financial service provider is “not maximizing” their bank’s services? Payday lending rates may be high, but direct deposit advances offered by banks and credit unions aren’t exactly bargains. Assuming that one’s bank could provide a service better than that offered by an alternative financial services providers is not a defensible assumption.

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[email protected]: “Reaching out to these unbanked or underbanked consumers may become even more complicated due to an unintended consequence of the low interest rates set by the Federal Reserve in an effort to jumpstart the U.S. economy. As a result of the Fed’s move, the story notes, banks are earning less on individual transactions, which means they will have to come up with new ways to make money. That might include raising fees for services, which in turn could lead to more consumers being priced out of doing business with traditional FIs.”

My take: Hello! Where have you been Wharton? Banks have been raising fees for services for the past three years to recoup the revenues lost to the weak economy and regulatory changes. Many consumers have already been priced out of doing business with traditional FIs. But…why is this assumed to be a negative? Who said that only a “traditional” FI could provide high-quality financial services to consumers?

This line of thinking seems to be rooted in some misguided belief that a checking account is some kind of God-given right, and that paying for the account (or at least paying more than some arbitrarily determined amount) is a violation of that right.

The EU seems to be moving in this direction. Given the financial troubles the EU is having, is this really a policy we want to emulate here in the US?

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[email protected]: “Although the FDIC notes that the unbanked and underbanked sector in the U.S. tends to be composed mainly of “non-Asian minorities, lower-income households, younger households or unemployed households,” this group is not a homogenous section of the population. Instead, they represent a range of races, incomes and ages “with different sets of needs and different challenges,” notes Raul Vazquez, CEO of Progress Financial, a community-based financial services company targeting Latinos.”

My take: Thank you, Mr. Vazquez — your comment is spot on. Mr. Vazquez blasts a common misconception that anyone who fits the label Unbanked or Underbanked is some kind of underprivileged consumer being taken advantage of by big evil financial institutions and alternative financial services providers.

Wrong assumption. There is a growing segment of the population called the Debanked — mainstream consumers who are highly educated, and either employed or employable (due to their current status as a college student) — who willingly, consciously, and rationally avoid doing business with a traditional FI.

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[email protected]: “Many people do not like banks because they are tired of being charged fees that were explained in small print that no one reads,” [Wharton professor Keith] Weigelt points out. “They feel banks rip them off.”

My take: Granted, disclosure statements could be simpler and easier to read. But one $5 fee doesn’t put someone in dire straits. The people who pay out $1000+ per year in bank fees are doing so because of some so-called hidden fee. They do so because of their own behavior. They need help that banks aren’t set up to do. An Aite Group analysis from 2009 found that about one in consumers with a bank account would be better off getting out of checking accounts and using prepaid debit cards to manage their finances. As fees have risen over the past three years, that percentage has to have grown.

The reality of the financial services industry is that for many consumers, using so-called alternative products from so-called alternative providers isn’t a bad thing — it’s a good thing.

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And, in fact, that’s exactly what Mr. Vazquez says:

“Vazquez says that in order for the unbanked to begin relationships with traditional financial institutions, it might be necessary for them to first use community based organizations and other alternative products.  “A bank is not necessarily built to meet the needs of these customers,” he notes. “With the overhead [banks] carry and the fees they impose on accounts, [the cost] might be too high for an independent banking relationship.”

My take: Mr. Vazquez is, again, spot on. But his comment hints at something I don’t hear many people talking about: That if the unbanked first use alternative providers before developing relationships with traditional FIs, then the unbanked aren’t always unbanked. In order words, for many consumers, unbankedness is a transitory phase.

What this means is that, rather than creating regulatory hurdles and constraints that force traditional FIs to serve the [temporarily] unbanked, public policy would be better served finding ways to fix the underlying factors causing the temporary unbankedness — which, in many cases, is temporary unemployment.

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[email protected]: “Banks are eagerly trying to attract a chunk of this “underbanked” population, but are still looking for the best way to do it. Their desire to serve this customer base may not be so much out of goodwill, Weigelt notes, as the desire for higher profits.”

My take: Banks have a desire for higher profits? Duh. That was a tough one to guess, eh? But part of the statement above makes no sense, and is indicative of the confusion surrounding the terms unbanked and underbanked. By definition, the underbanked are already doing business with banks. So banks really aren’t “looking for the best way” to attract them. They already have them. But, for whatever reasons, banks aren’t providing all the products this segment needs. Maybe it’s because they can’t provide those products profitably. If that’s the case, then banks really aren’t looking to provide those services to this consumer segment.

I don’t believe that banks can’t profitably provide those services, and have published a number of Aite Group reports over the past year trying to make the case.

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Bottom line: Consumer advocate groups, industry pundits, and other uninformed observers need to understand this: So-called alternative products are no longer alternative. And that terms like unbanked and underbanked have outlived their usefulness. 

It’s time to kill the unbanked.

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