Although financial service inclusion rates have risen over the years, the harsh reality is that millions of consumers and small businesses are without any support from a reputable financial service provider.
According to Federal Reserve data, over one in five Americans have no bank account and rely on alternatives like check cashing services, pay day lenders and pawn shops. Many small businesses additionally use non-traditional sources for credit and banking.
A major influence contributing to this situation is cultural: Minority and immigrant populations are more likely to avoid large banks and may assume local financial institutions are the same. Additionally, these groups are being targeted by newer fintech apps offering the ability to easily send international payments, an in-demand need.
If community financial institutions make a few adjustments and efforts specific to the needs of these consumers, they could find themselves with a whole new group of customers.
The U.S. Population Outside of Banks
Who is this underserved population? According to Fed data, those earning under $40,000 per year were most likely to lack a bank account or rely on other methods. On the other hand, it is rare for those earning $100,000 or more per year to avoid banks. It is understandably more difficult for a lower-wage earner to maintain a savings account or qualify for certain banking products.
Minority and immigrant populations are both big users of smartphones, making that one key way to serve them, if your app is up to speed.
In the small business world, many entrepreneurs avoid traditional financial institutions due to a lack of access, minimum requirements that they can’t or don’t want to meet, or even perception. Minority populations were also found to be significantly less served. In fact, Black business owners statistically face more rejection, higher interest rates and other forms of discrimination than non-minority owners, CNBC reports.
This trend extends into personal banking. Only 50% of Black and 66% of Hispanic consumers were considered fully banked, according to the Fed, meaning they utilize an accredited bank for all their financial needs and do not depend on other loan services or pawn shops.
These statistics paint a grim view as alternative financial providers can prey upon those in need of quick cash with high rates and unfavorable conditions.
The Smartphone Phenomenon
While underbanked populations have historically become stuck in a cycle of relying on costly, alternative financial services, that’s changing with the prevalence of smartphones. Among these groups, a large percentage have access to a mobile device or internet, making them prime candidates for financial institutions or third-party apps that offer mobile financial products, according to Ernst & Young.
The problem is many credit unions and community banks are behind the curve in the digital space compared to more sizeable banks and fintech competitors. This suggests that while their personalized and low-cost brand may strongly appeal to this group, the lack of digital access could inadvertently push their business elsewhere.
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The International Payments Factor
As mentioned, many underbanked consumers are immigrants with families or businesses overseas. Americans send more money internationally than any other country, by far. In fact, an incredible $148 billion was sent from the U.S. internationally in a single year, according to Pew Research Center. Much like alternative financial products, there’s a wide array of money transfer services available with varying costs.
Latino-owned small businesses are the fastest growing segment of entrepreneurship in the U.S., but they also have the lowest access rate to traditional bank loans and services. If community banks and credit unions want to capture this audience, the opportunity is there.
What Community Banks and Credit Unions Can Do Now
Smaller financial institutions have long prided themselves in serving the community and providing opportunities to those that big banks overlook. Yet part of the U.S. population is without the support of a bank in both business and family life. This leaves a gap that community banks and credit unions could fill, with a few small adjustments. Here are four suggestions for how they can tap this market.
1. Targeted outreach. If financial institutions want to reach minority communities, they must first consider the barriers that these individuals face. Offering campaigns in other languages and acknowledging the additional challenges faced by these groups will make these potential customers feel more welcome and comfortable.
2. Financial education. As mentioned, some of the gaps in financial inclusion are due to a lack of awareness or misinformation. Many unbanked consumers lump smaller financial institutions in with big banks, without realizing that these smaller organizations are more favorable to small businesses and local families.
3. Digital first. Many underbanked communities are targeted by fintechs due to the widespread use of smartphones. These digital methods can be more appealing to this group because it is a more seamless way to do banking: they do not need to travel, live near the institution, or potentially face prejudices. Community institutions need to be able to match such offerings, possibly through partnering.
4. International services. Immigrants with international ties are no stranger to foreign payments. Many regularly send funds abroad and minority groups lead the creation of small businesses. Offering a convenient way to access these services is a good way to onboard new customers and introduce them to further products.