Don’t overlook the underbanked. That’s the central message of a recently-released Javelin Research report that describes the market for underbanked consumers and strategies for turning them into fully banked customers.

The firm estimates 35 million Americans are underbanked; about 15% of the population.

By “underbanked,” Javelin is referring to people who don’t have a checking account or a primary banking relationship. They may have a prepaid card. (The unbanked, who have no bank relationship at all, are a sub-segment of the underbanked.)

The underbanked tend to be young — 36% are 18 to 24 years old. The very nature of their youth means “a big portion of this group will change; they’re not going to be underbanked in the future,” said Mary Monahan, executive vice president and research director, mobile at Javelin.

“What’s interesting about this population is their income is not as low as you’d expect,” Monahan said. The average income of the underbanked population is $52,000; the average among the total U.S. population is $73,000. They’re slightly more likely to be African American or Latino than white.

The underbanked is not one group of people, but rather several different groups, Monahan noted. One is the unemployed. Although the national unemployment rate is only 8%, that number doesn’t include people who have been out of work for a long time, so the true percentage of unemployed is much higher. Among the underbanked, the unemployment rate is 12%. “Being unemployed hurts people’s credit, and sometimes they can’t get a checking account,” Monahan observed.

Another group is the tech-advanced underbanked, who make heavy use of smartphones and use their smartphones as computers, watching TV and paying bills with them. There’s a tech-challenged group that uses prepaid phones or phones with no data plans. These consumers will need simple SMS banking and alerts.

Another category of underbanked is the immigrant who needs to send money back to people in his home countries. This group tends to use a lot of wire transfers and remittances. More than twice as many underbanked consumers send wire transfers as all consumers and three times as many use remittance services such as Western Union. But even more say they are likely to use mobile international P2P, even though it doesn’t yet exist.

“Remittances are expensive because they’re cash based,” Monahan said. “If you can turn that into mobile transactions, that lowers expenses but also creates opportunities for other companies to serve this population. Once they’re able to do things like take pictures of checks to deposit them, they don’t have to turn them into cash, they can transact using person-to-person payments and prepaid accounts. That really opens the door to turning a cash-based economy to a digital economy.”

This can help the countries receiving the money, she says, because “now something that wasn’t showing up in GDP is showing up. It’s good for institutions because they can get a sliver of these transactions, and it’s cheaper, better and safer for the consumer. They don’t have to carry cash and they don’t have to walk over to the drugstore to cash a check.”

The underbanked typically have less access to desktop computers (60% vs. 72% for all consumers) and are less likely to pay for broadband services (34% vs. 59%). “If you try to make them use online banking, you’re cutting off your nose to spite your face because they’re not going to do it,” Monahan says. “You want to allow them to transact via mobile. They’re already showing a higher propensity to do mobile banking.”

What are these people doing instead of using banks? Mostly they just use cash. About 8% use prepaid cards. “These are people who don’t have other habits, you’re not displacing anything,” Monahan says. “It’s real easy to supply something that works better.”

Several banks are going after the underbanked with prepaid cards, Monahan says. (She did not give specific examples, but Chase launched a prepaid card called Liquid for this market in May.)

(Source: American Banker, 06/14/12)

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