During the recession, the number of people categorized as unbanked — without a checking or savings account — or underbanked — without access to credit — increased. In a new study, consulting firm KPMG suggests that banks can make money from this group, not by bringing them back into the financial mainstream, but by offering them “alternative” products like prepaid debit cards and money orders.
Banks aren’t the only ones seeing a potential market in the unbanked. Some big-box retailers have begun offering bank-like services, letting customers cash a check or pay a utility bill.
Around nine million households in the U.S. are unbanked and 21 million are underbanked, according to the FDIC. Most of these people rely on a patchwork of products and services to handle everything from cashing a paycheck to paying rent. Check-cashing storefronts, payday and title lenders, and pawnshops function as de facto banks. It’s challenging as well as expensive to navigate through 21st-century life without access to a checking account or credit, as a SmartMoney writer documented in a two-week experiment to live a cash-only life.
The KPMG report identified several subsets of the unbanked and underbanked, from the working poor and new immigrants to young adults to older people who suffered a job loss or other disruptive event. Some would need to rebuild a damaged fiscal history to reenter the financial mainstream; others would have to start from scratch.
Ideally, financial services should help people establish or rebuild credit and guide them towards an “on-ramp” of mainstream banking. “When serving this market, banks also have an opportunity to establish customer loyalty by helping these customers more effectively manage their personal finances and develop better saving and investing habits through educational, financial literacy programs,” a KPMG director said in a statement.
Unfortunately, the types of products identified by the company do little more than replicate the second-class offerings already available to this demographic. The KPMG report lists walk-in bill pay, check cashing for non-customers and various kinds of money transfers for the unbanked, and cash advances, prepaid debit products and secured credit cards for the underbanked. Of this list, only one — secured credit cards — helps consumers establish a mainstream financial footprint. Banks might be able to earn money by offering consumers the other services, but the benefits to consumers will be minimal beyond meeting their immediate cash-flow need.