It's Time To Retire The Term Underbanked

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I attended a conference this week attended by folks from large Utilities who are involved with the billing operations within their organizations. They’re interested in consumer trends and payments which accounted for my being asked to speak.

What caught my attention were these two comments made by two of the other speakers:

“With so many un- and underbanked consumers out there, who have no access to a bank account, accepting alternative forms of payment is becoming very important to billers.”

“Among consumers with income less than $30k, who we typically refer to as the underbanked, smartphone penetration has reached nearly 30%.”

While a sample of two is hardly a representative sample, I think it’s a pretty good bet that these aren’t the only two individuals in this country who have some serious misconceptions about who the under-banked are.

According to he FDIC:

“Underbanked households are defined as those that have a checking or savings account but rely on alternative financial services. Specifically, underbanked households have used non-bank money orders, non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or refund anticipation loans at least once in the past five years.”

My take: It’s time to strike the term “Underbanked” from the lexicon.

The growth in the use of “alternative” financial services has shot up significantly in the past few years. So-called alternative products like prepaid debit cards are already — or fast becoming — mainstream (i.e., not alternative) financial products.

The reality of the financial services world is that many of the consumers who use check-cashing services or payday loans are not the underserved, disadvantaged, uneducated, preyed-upon-by-the-big-evil-banks consumers that consumer advocate groups often portray them as.

The FDIC says that the Underbanked:

“Have access to a bank account, but nevertheless rely on more costly financial service providers for a variety of reasons.”

There are two big problems with this statement:

1. Who says alternative products/providers are more costly? Monthly fees on a checking account could run $5/month. Banks want to (or wanted to) tack on fees for debit card use that would make those monthly fees even higher. Prepaid card fees are roughly similar with no additional fees for the use of the card. And have you seen overdraft fees? Reality is, depending on one’s behavior, the cost of a mainstream financial product could be way higher than an alternative product.

2. The “variety of reasons”  include reasons that no one has the right to argue with. Example: Assume my neighbor and I make the same amount of money. I choose to buy a low-cost Honda, he chooses to buy a high-cost Mercedes. Do we have a right to criticize him for buying a higher-cost product? Do we criticize Mercedes for selling a higher-cost product to someone who chooses — for whatever reasons — that higher cost product? Why is it any different in financial services? Please don’t give me the “because we have to bail out big banks when they fail” argument because we bailed out the auto makers, too. People have different reasons for choosing different products, and there’s simply no good reason (political reasons being bad reasons) for criticizing people for choosing a higher cost product if that’s what they want.

Bottom line: The use of the term Underbanked has loaded political connotations. But the connotations relate to a set of consumers that do not correspond to who the consumers in the segment actually are. 

There is only segment that matters in these discussions: The Unbanked –consumers without a checking account, savings account, or prepaid debit card account — who can’t afford to have one of these products.

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