ABA Banking Journal - September 2007 - (Page 38A)

DIGITAL EDITION BONUS FEATURE What do the underbanked want? Not always what you’d assume New research sees many common elements, yet many unique factors, among the broad underbanked category. Banks need to fit this into the bigger picture I f a bank wants a rule of thumb for serving the unbanked and the underbanked, for Jennifer Tescher, it all goes back to Mom. “For me,” says Tescher, director of the Center for Financial Services Innovation, “the rule is, ‘Would you sell this to your mother?” To this Tescher adds a backup test: “Would you feel comfortable telling your mother than you sell the product?” 45% have savings accounts, and 27% have loan balances. And further, 28% have retirement savings, 8% have CDs, and 8% have started college savings plans. Among the entire sample, 30.3% would like to open a checking account within a year, nearly 40% would like to open a savings account in that period, and 21.5% would like to have a loan. Changing attitudes Tescher, a former journalist, has been involved with ShoreBank, the Chicago-based community development bank, since 1996, and now heads the Center, which is a nonprofit affiliate of ShoreBank Corp. She believes the banking industry has been undergoing a change in heart vís a vís the unbanked and underbanked over the last five years or so. “There is a real business opportunity here,” she says, and banks are coming to understand that, where they formerly saw the markets more from a Community Reinvestment Act and compliance perspective. The Center defines the “unbanked” as consumers and households that lack a transaction account at a mainstream financial institution. The Center defines the “underbanked” as consumers and households that use a blend of services provided by mainstream and alternative providers—such as payday lenders and check cashers—to meet their financial needs. For banks that haven’t come to terms with these markets, Tescher suggests that doing business with these segments may be closer than executives realize. “You may think these people aren’t your customers,” she says, “but often they are banking customers.” Recent research by the Center and its partners indicates that many people have their feet in both the banked and the unbanked worlds, in a sense. In fact, the recent survey, which follows in more detail, found that about 60% of underbanked consumers surveyed have checking accounts with traditional financial institutions, By Steve Cocheo, executive editor. If you find digital edition bonus features helpful, please tell us so at scocheo@sbpub.com Why do they need cashers? This leads to a natural question: Why do so many of the underbanked use check cashers if they have checking accounts with banks? In a word, says Tescher, it’s “liquidity.” Liquidity, says Tescher, is a huge driver for much of the underbanked population. “If you are living paycheck to paycheck,” she explains, “you probably don’t have enough in your account to cover the checks you need to cash.” Such customers may not be able to wait out the check hold periods that apply to their checks, so they need to go to check cashers instead. In a related vein, Tescher addressed fee-based overdraft checking service. “I think there is going to be a day of reckoning, pretty soon,” Tescher says, “whether it is legislative or just backlash from the customers themselves. It’s untenable for the industry in the long term.” She noted the heat that FDIC has subtly put on the feebased overdraft trend, and the legislation (H.R. 946, the Consumer Overdraft Protection Fair Practices Act) pending in the House—including backing by House Financial Services Chairman Barney Frank (D.-Mass.). When the day of reckoning comes, says Tescher, it will force a reexamination of short-term consumer credit products. As a result, she suspects, other banking products that give the consumer greater control and choice may become more popular. She says that modern credit-risk-rating capabilities will enable institutions to design and price line-of-credit products in such a way to make them a viable substitute for the fee-based overdraft plan. A summary of the research referred to earlier begins on the next page, followed by more in the special report. 38a SEPTEMBER 2007/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.cfsinnovation.com http://www.cfsinnovation.com http://www.shorebankcorp.com http://www.shorebankcorp.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - September 2007

Contents Editor's Column Briefing: Why Money Sense is a Top Priority Briefing: Sleight of Mind Briefing: Snapshot: What the First Half Tells Us About the Second Half Briefing: ABA Resources ABA Chairman’s Position Briefing: Get Away and Get Ahead: ABA's Banking Leaders Forum Community Banking: Trim the Fat: Winning the "Battle of the Buck" Community Banking: Pass the Aspirin Cover Story: Meeting the Challenge of the "Unbanked" Bank Marketing: Don't Miss the Boom! On the Job: Time to Power Up Your Presentations? Insurance Sales: The Art & Craft of Cross Selling Tech Topics: The Price is Right? Tech Topics: Security: Protect Information First Tech Topics: Hackers for Hire? You Bet'cha Tech Topics: Case in Point: Tellers Scan, Too, at First Federal Compliance Clinic: Adverse Action Clarified The Economy Banker’s Mart To Advertise/Index of Advertisers

ABA Banking Journal - September 2007

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