Using Customer Data to Serve the Underbanked

Increasing business with underserved consumers represents a significant opportunity for the nation’s banks. In its landmark study to measure the underserved population, the FDIC reported that approximately 20% of American households with deposit relationships currently rely on alternative financial services providers. Research has repeatedly shown that many in this segment spend up to $100 per month for transaction services, most of it outside of banks.

Considering the entire universe of underserved consumers – those with and without bank accounts – the Center for Financial Services Innovation recently estimated that this market generated about $45 billion in fee and interest revenue for providers in 2010. While we continue to see some debate over the degree to which some of the fees in this figure are appropriate, it does highlight a large (and growing) sector.

Recently, the conversation has shifted from one of why serving this consumer makes sense to how best to serve this segment. At a time when banks are scrambling to identify new sources of fee income, especially in the low-balance depositor segment, where revenues from overdraft and debit interchange have driven past profitability, there remain significant growth opportunities. However, as the successes of retailers and alternative financial services providers in this space show, driving profitable results from underserved consumers requires an understanding of consumer needs and organizational buy-in.

Long-term success with the underserved segment, as with any other market, requires strong organizational commitment. Those institutions that do want to grow profits in a sustainable manner should be assessing their current business and making changes in four areas.

Defining the customer. The definition of a customer to a retailer is quite simple: a consumer that buys something. For most bank staff, the definition is more nuanced. Customers are most often seen as those who have some combination of deposit and lending relationship and, typically, the bigger the balance, the better the customer.

While there is a migration to and from banking products within the underserved segment, many will never have a traditional deposit relationship. Others that do will continue to utilize nonbank (prepaid, money transfer, check cashing) services. Institutionally, and in the eyes of front line staff, we must be willing to broaden the definition of customer to include consumers paying (often handsomely) for transaction services.

Creating real value. While there is debate over the pricing of some services targeted to the underserved, we see a willingness to pay for value. Someone who has a minimal savings account in order to cash checks at a bank may be paying bills, sending money, cashing other checks and borrowing using other sources. Whether because those services are not offered by a bank, not understood by the customer, or whether it’s simply a matter of preference, banks are losing out on a significant revenue stream from existing customers.

Research segmenting the underserved market based on financial and behavioral characteristics shows a preference, particularly among those segments with existing deposit relationships, to conduct business at a bank or credit union. Banks are also listed as the preferred source to turn to for financial advice.

Banks are competing against lower prices, convenience, and welcoming environments when vying for a greater share of the financial services spend in this segment. Understanding the consumer segments within the underserved market and what drives them – convenience, relevance, trust and value – is key to creating a compelling value proposition.

Focus on integrated delivery. This year’s BAI Retail Delivery event hosted an increased number of vendors focused exclusively on the underserved customer and many of the established technology providers presented clear strategies around this segment. FIS has invested in integrating DepositShield to front-end applications to improve check cashing capabilities and decrease customer dissatisfaction from unnecessary holds on deposited items. Nexxo Financial continues to build out functionality in self-service kiosks combining money transfer, check cashing, and prepaid cards, allowing financial services companies to deliver a broad array of transaction services without the cost dynamics of traditional branch delivery models.

Banks can create competitive advantage over alternative financial services providers by offering a fuller array of products and services, but only when done in an integrated and accessible manner. Long-term success depends on integrating the delivery of “nonbank” services into banking platforms. Doing this lowers the cost of delivery while improving access to services through a variety of channels. It also improves the visibility into customer behavior, enabling better identification of cross-sell opportunities for those who may not yet have traditional bank relationships.

Measure value and target customers. Data is a byproduct of banking and can be put to use for customer analytics. How many customers receive some kind of direct deposit and immediately withdraw nearly all of it in cash? How many customers spend significant sums of money cashing paychecks and conducting financial transactions, but all the bank sees is an even dollar deposit every so often into a (unprofitable) savings account? Banks who succeed in this segment will be able to identify and target prospects and incent deepening these relationships as they do with any other segment.

As an industry, banking has made sizeable investments in systems designed to measure and track customer profitability; however, these systems are primarily geared toward traditional banking models. As banks begin to offer more services that fall outside of conventional bank product models, it is essential to capture data on this non-traditional behavior.

There are market-tested models of many varieties showing the profit potential of serving this segment with high quality products and services, including Kinecta Express at Manhattan Beach, Calif.-based Kinectra Federal Credit Union and the Carver Community Cash initiative at New York City’s Carver Federal Savings Bank. Consumer research and experience provides a blueprint for delivering financial services value to traditionally underserved segments.

Mr. Turnbull is a managing consultant, advisory services, with the Chicago-based Center for Financial Services Innovation. He can be reached at [email protected].