By Edna Sawady and Jennifer Tescher

Those without formal banking relationships represent a tremendous opportunity to grow new business for a financial services industry that is confronting many challenges. Many providers mistakenly assume that all un- or underbanked consumers can be painted with the same brush. In fact, nothing could be further from the truth.

While underbanked consumers differ from their banked counterparts, they also differ among themselves. Indeed, they represent many different markets, based on their likes and dislikes, attitudes, behaviors, financial situations and other factors.

When developing an underbanked strategy it is important to understand the differences between the under-banked and their banked counterparts, along with differences among sub-segments of the underbanked population. Understanding these subtle and not-so-subtle differences is the key to creating an underbanked strategy that is both profitable and operationally feasible.

Financial institutions and financial services extensions of retailers and other industry players have begun to recognize the enormous potential in serving underbanked households, which some estimates place at as many as 40 million. In spite of the challenges, there is some good news. The majority of respondents in a recent research survey indicated they were “open” or “very open” to establishing a relationship with a mainstream financial services provider. Respondents also indicated strong interest in acquiring mainstream financial products, such as checking and savings accounts, loans and investments. They also expressed clear financial goals, such as getting out of unproductive debt, rebuilding credit, starting to save, and learning how to use loans to build productive assets.

To attract underbanked consumers and serve them well, providers should consider focusing on a manageable number of sub-segments that best fit their product and delivery capabilities and their operating philosophy.

Financial services providers wishing to embark on this task can get helpful insights from two segmentation studies of the underbanked market released by the Center for Financial Services Innovation (CFSI) in the last 18 months. Released in February 2007 in partner­ship with KeyBank, The Power of Experience in Understanding the Underbanked Market describes the results of a study to segment check-cashing customers and provides lessons for developing an appealing financial services experience. The CFSI Underbanked Consumer Study, released in June 2008, defines eight underbanked consumer segments and uncovers new facts about these consumers’ preferences and their attitudes toward financial services.

First let’s focus on the differences between underbanked consumers and their fully banked counterparts. Generally speaking, they tend to live in a cash economy, with many of their financial decisions driven by the realities of their day-to-day lives. Incomes are moderate, assets are few, jobs change and family structures are mercurial. Money comes and goes, trust is fragile and “having cash in hand” is comforting. Over the years, people found ways to address their financial service needs outside of the mainstream system — through check cashers, payday lenders, retailers, friends and family. Underbanked check cashers place much more weight on previous experiences with the financial system, check-cashing companies, and institutions broadly defined. In addition to appropriate products and services, these consumers strongly emphasize intangibles such as respect, trust, safety, security and a sense of belonging.

The underbanked perceive significant barriers to establishing banking relationships. By understanding who these consumers are and how they make decisions, providers can develop appropriate services for them and, in time, form lasting relationships that are a win for all parties.

Notwithstanding the uniqueness of the underbanked market in its entirety, there are significant differences among sub-segments. CFSI’s Underbanked Consumer Study reveals eight customer segments that differ in many ways. (See 'The Types of Underbanked Consumers' below.)

Common Threads

Some observations cut across multiple segments of the un-and underbanked and have important implications for financial services providers trying to reach and serve the underbanked.

• Underbanked consumers are comfortable with the informal economy — a trusted network of friends, family and community members, including check cashers — and are often confused by mainstream institutions and their policies.

Through the research, we learned that casual lending and borrowing money from friends and family is common — there are no contracts, promises are trusted and the social network will continue to lend even without being paid back. Financial transactions flow through a web of personal relationships, based on trust built over time. This is the ultimate “relationship banking;” it just happens to not involve banks. Check cashers, payday lenders and sub-prime mortgage lenders are part of the community.

In contrast with the comfortable feeling of this familiar informal economy, there is much confusion among underbanked consumers about mainstream institutions and their policies, leading to feelings of not belonging. Identification requirements are interpreted as discrimination; overdraft fees are perceived as betrayal.

Imitating the relaxed reciprocity of social networks is impossible, but a mainstream financial institution could help reduce anxiety by clearly spelling out prevailing practices, their underlying logic and the consequences of not following them. That would greatly increase trust, familiarity and comfort with financial institutions. Examples include communicating caution before an account is overdrawn, clarifying consequences of late payments and articulating benefits of on-time payments.

A fundamental feeling of not belonging drives much of the mistrust of mainstream institutions. Financial services providers could counteract this by sending messages of inclusion through product design, qualification criteria, choice of location, hours of operation, language, tone of advertising and many other aspects of daily operations. Frontline employees can also make or break the relationship with underbanked consumers.

• Physical surroundings matter. Many people are uncomfortable in an institutional setting and would prefer a less formal environment. Safety and confidentiality are important too.

Likewise, physical surroundings can be daunting. Many unbanked consumers are uncomfortable in an institutional setting with plush carpets, desks, security guards and customer wait lines. Some are intimidated by bank employees. Others feel out of place because they perceive other bank customers to be in a higher socioeconomic class. Physical spaces can evoke memories of negative experiences with large institutions. No matter what the cause, the result is a sense of physical discomfort that may provoke a “fight or flight” reaction.

One obvious solution is to be deliberate about the feeling created by the physical branch environment. Underbanked consumers will be more comfortable in less formal surroundings. A balance needs to be struck between creating a business setting and creating one that is uncluttered, easy to navigate and inviting. Very clear signage and a greeter at the door are two elements that could be helpful in creating comfort.

The ethnographic portion of the research also brought out deep concern with safety, both physical safety and information security. For example, while all the segments had distinct experience preferences that require different management and communication approaches, “keeping information confidential” was one item that consistently surfaced as the first or second most important element when people consider where to cash checks. In only one segment was this not in the top five most important experience criteria.

• Respect is paramount. Financial institutions can show respect through convenient locations and hours, friendly employees and direct communication about charges and other policies.

The notion of respect was voiced repeatedly. Though warm, friendly service is expected and important, underbanked consumers are very sensitive to subtle, many times unintended, manifestations of disrespect. Customers perceive messages of respect or lack thereof in product design, qualification criteria, choice of location, hours of operation, language, tone of advertising and many other aspects of daily operations. Accommodating consumers’ preferences in all these areas, however, could be operationally complex and expensive.

There are many ways to show respect, and financial services providers must find those that are feasible for them. Examples include adopting respectful and culturally sensitive communication patterns, and following up with a letter or a phone call to ensure that any unresolved problems have been addressed. Clear communication about charges is also a way to show respect. Consumers indicate irritation with penalty fees, which they perceive as “hidden.”

• Underbanked consumers may not be served well by traditional financial products. Banks may need to think about how to offer check cashing, money orders and low-cost remittances, for example.

Many consumers are not served well by traditional mass-market financial products. Check cashing, money orders and low-cost remittances are missing elements in typical banks’ product offerings. Yet these are services that are important to the underbanked and sorely needed. Besides these basic transaction services, the underbanked might also be interested in credit and debit card products, investment and insurance products. Providers should critically evaluate their product offerings to fit with the needs of underbanked consumers and assess the market when guiding any new product introductions.

• Underbanked consumers are interested in learning about financial matters but may not have time for traditional classes. Experiential learning, online courses and peer coaching might be alternatives.

Underbanked consumers exhibited strong interest in learning more about financial matters. Yet, a much smaller number of consumers took advantage of opportunities offered by banks to enroll in classes. It is hard to know whether this is a result of time constraints, convenience issues or a feeling of discomfort in educational settings. It may also be that many do not perceive a tangible benefit and are hard pressed to justify a significant investment of time and energy.

Providers may find it worthwhile to evaluate other delivery channels, such as experiential learning, online courses and peer coaching. People are more likely to participate in educational opportunities when they are engaging, creative and applicable to everyday life.

Conclusion

In seeking ways to serve the under-banked, financial services providers are likely to derive both financial and social benefits. The underbanked represent a large market — as many as 40 million households — and many underbanked consumers have a strong interest in developing or expanding relationships with mainstream providers. Many want to improve their financial health, perhaps by getting out of debt, having a savings account, opening a college savings account or taking out a loan.

But these consumers are not all the same, and providers need to choose for themselves which segments make most sense to serve. More than just creating a new product or service, they need to understand consumers’ detailed experience preferences, design the experience around those preferences, clearly communicate their own values and ensure they have the operational capability to deliver on stated and implied promises.

About the Authors

Edna Sawady is a strategy consultant, advising financial services providers, foundations and non-profit intermediaries on creating and operating innovative financial services programs. Areas of recent focus include bringing underbanked consumers into the financial mainstream and facilitating the creation of individual and community assets. The CFSI/KeyBank study cited in this article was conducted in partnership with Market Innovations Inc.

Jennifer Tescher is the director of the Center for Financial Services Innovation (CFSI), which facilitates financial services industry efforts to serve underbanked consumers across the economic, geographic and cultural spectrum. CFSI works with banks, credit unions, technology vendors, alternative service providers, consumer advocates and policy makers to forge pioneering relationships, products and strategies that will transform industry practice and the lives of underbanked consumers. For more on CFSI, go to www.cfsinnovation.com.

The Types of Underbanked Consumers:

• “Cash is King:” These are consumers who are most likely to rely on cash for their financial transactions. They are the least likely to have (or have had) checking or savings accounts. “Cash Is King” consumers have much lower household incomes than other segments and are more likely to be struggling to make ends meet. This group is highly unlikely to make financial transactions in a bank or credit union.
• “The Next Wave:” This is a group that is trying its best to cover basic needs and is also hoping to reach financial goals, such as owning a home. This group is more likely to make non-bank financial transactions, and is also less likely to currently have checking or savings accounts. Cash does play an important role, but this group wants to save money and is looking to earn interest.
  
• “The Strivers:” Strivers are a financially aggressive group who take an active role in their money management. Many are active users  of checking or savings accounts and conduct a fair amount of financial transactions. They enjoy having checking accounts so they can keep  track of their spending and to more easily pay bills, while savings accounts keep their money secure. Though more than half of “The Strivers” have a checking account, some do not and reasons for that often include concerns about keeping their personal information private.
  
• “Middle of the Road:” “Middle of the Road” adults are also active financial money managers, but are less likely to have come from  families who have banked. Those in the group that do bank are most likely to make their financial transactions in a stand-alone bank or  credit union because of what they feel are more efficient transactions and friendly, helpful employees.
  
• “My Way:” The “My Way” group enjoys the ease of paying bills and making purchases with checks. This group makes frequent bank and  non-bank transactions at various places, including convenience stores. “My Way” consumers want transactions done quickly, conveniently  and safely. They don’t want any hidden fees or high minimum balances.
  
• “The Savers:” As the name implies, saving money is the key reason these consumers want to have bank accounts. Among those who  do not have a checking or savings account, they cite the security of their personal information as their number one concern. Savers make more frequent transactions at non-bank places like supermarkets, convenience stores and discount stores. They look for access to information on products and services either through classes or brochures. Keeping themselves and their spending in check is key, as these savers are less likely to borrow money.
  
• “Almost There:” Members of the “Almost There” cohort are more likely than others to be part of traditional financial institutions via a  checking account — over 60 percent have them — to make bill paying easier and keep track of their spending. A smaller portion of “Almost Theres” have savings accounts. They are more comfortable making transactions in a bank or credit union than non-bank institutions, but  prefer banks or credit unions that are contained within a store rather than stand-alone buildings.
• “Borrowers:” This group’s name is indicative of the fact that they borrow money frequently and for a wide variety of reasons. They have had student loans, personal loans, lines of credit, home equity loans, payday loans, automobile loans — all at higher rates than the average adult. The amount they borrow tends to be lower (less than $1,000), but again, are more likely to borrow from their bank than a family or friend. Borrowers make above average transactions at a variety of places including banks or credit unions, supermarkets, convenience stores, drug stores and super centers.
  

Source: CFSI Underbanked Consumer Study, 2008

Who Are the Underbanked? Demographics and Characteristics

• U.S. underbanked population: 40 million households (106 million individuals)
• Household Income: $26,390 (median), $47,500 (mean)
  
• Ethnicity: 60% White (Non-Hispanic), 19% Hispanic, 16% Black (Non-Hispanic), 5% Other
  
• Homeownership: 63% own, 28% rent, 8% live rent-free
  
• Adults living in household: Three (mean)
  
• Marital Status: 29% never married, 27% married, 16% divorced/separated, 8% widowed
  
• Children in household: 45% yes
  
• Employment: 47% full-time, 11% part-time, 41% not-employed*
  

* Retired and homemakers make up 52% of those not currently employed
Source: CFSI Underbanked Consumer Study, 2008