To Serve the Underbanked, Emulate Retailers

Recently overheard: “Banks and credit unions are going to cede the underbanked market to other players.” I disagree. Banks and credit unions of all sizes are well positioned to serve underbanked, low-income consumers. However, in order to succeed, they should examine three lessons they can learn from other players in this space, especially retailers.

Walmart, Kroger, Kmart, and other retailers have all made serious forays into financial services over the last several years. Walmart has the greatest visibility and is the most established retailer in the space. As the Washington Post recently reported, Walmart has “opened roughly 1,500 MoneyCenters that process as many as five million transactions each week.” These numbers most likely do not count hundreds or thousands of customer service desks that Walmart has transformed to better offer financial services or the tens or hundreds of thousands of check out/point-of-sale stations where consumers can quickly conduct basic financial services. At Walmart, customers can cash payroll and government checks, transfer money, pay bills, and purchase or reload a general purpose prepaid account.

In 2009, Kroger introduced their Money Shops, a high-end store location where customers can meet their transactional needs and obtain other financial services such as credit monitoring services, identity theft protection or even pet insurance. Kroger’s next stage of deployment for financial services is through customer service desks, currently in pilot at 26 Dillons stores in Wichita, Kansas. At these locations, customers can obtain prepaid accounts, conduct money transfers, purchase money orders and cell phone services and cash checks.

Sears moved further into financial services in late 2008 by bringing back its layaway offering, followed the next year by the Sears/Kmart Christmas Club to help customers save for holiday gifts. Today, Kmart is also in a pilot phase of offering basic transactional services at customer service desks. Such efforts demonstrate retailers’ belief that consumers need these financial services offerings and that their companies can profitably offer them. Financial institutions should expect to see more from these retailers in the future.

So, what lessons do these retailers provide for banks and credit unions? First and foremost, start with customer needs, then leverage your assets. Customers rely on retailers for convenient shopping of everyday items. Kroger, Kmart, and Walmart are building on that convenience and trust to deliver the financial products their customers need. Yet, many of the underserved actually prefer to work directly with banks and credit unions, which are well positioned to meet these customers’ core financial needs of building credit and saving for the future.

Second, be straightforward and transparent. Retailers know how to price products upfront in straightforward, direct ways. Banks and credit unions would be well served by ensuring that all their fees are clear and well communicated and that customers understand how to use their products effectively.

Third, innovation can help customers and return value to the business, as the above retailers have demonstrated. Providing transactional services is likely the first step. As retailers further understand customer needs and the value financial services bring to their companies, we are likely to see more innovations to help customers borrow and save. Financial institutions are being forced to reevaluate their products and profitability models. This provides a tremendous opportunity to innovate in positive ways that add value for customers and result in sustainable business.

Financial services are in a period of flux. Banks and credit unions are scrambling to respond to new regulations and regulatory pressure, changing consumer needs and preferences and evolving product structures and profitability models. In this time of evolution, financial institutions need to recognize there is a large underserved market that they are well positioned to serve. Retailers have recognized this opportunity and banks should emulate some of their products and delivery models.

Ms. Gartner is vice president, advisory services, for the Chicago-based Center for Financial Services Innovation. She can be reached at [email protected].