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In Attracting the Underbanked Population, Banks Will Need to Do Their Homework

By: Alex Peak

While banks might believe the unbanked and underbanked populations are low-hanging fruits on the tree, they require some strategy and tact to successfully nab.

According to the FDIC’s National Survey of Unbanked and Underbanked Households (2009), about 7.7 percent of U.S. households are unbanked — meaning they have no checking or savings accounts. An estimated 17.9 percent of households are underbanked — having poor access to banking services. Nearly 30 million people are living with substandard financial services. And a significant number of those households are ethnic or racial minorities (an estimated 21.7 percent are black and 19.3 percent Hispanic, according to the survey).

Instead of having traditional banking accounts, multitudes are turning to payday loan or check-cashing type companies, which often end up bushwhacking customers with exorbitant fees and interest rates.

Kelly McDonald, president of McDonald Marketing in Dallas and author of “How to Market to People Not Like You,” said marketing toward underbanked populations is such a prolific topic right now that nearly 25 percent of her speaking engagements across the country are centered on it.

“These are people who are unbanked — somebody’s going to get them at some point,” McDonald said. “Everybody wants them. It’s much easier to go get someone who’s unbanked, and spend a little bit of time teaching them about financial literacy and financial services than it is to go crowbar somebody else away from one bank to your bank.”

However, it takes more than just waiting for these underbanked customers to stroll into your lobby, McDonald contends. Banks must take the initiative to learn about the cultures in their communities and be willing to engage with them outside of a banking environment. These people are not avoiding banks for no reason at all; intimidation and language barriers are significant factors veering them away from the traditional banking system.

“Start from the grassroots standpoint — rather than trying to bring the consumer to you, go to the consumer,” McDonald said. “Find out where those people are, and put on free seminars or free evening classes where there’s no hard sell, no high pressure. There’s nothing other than good solid information on ‘here’s what you need to know about banking.’ And take that message to churches, YMCAs, community centers and local fairs and festivals.”

The concepts of “banking” or “financial institutions” can have mixed interpretations among different cultures. In some areas of the world, banks might require customers to have thousands of dollars to even open a basic account; or worse, because of corruption within institutions, bank customers may have no reason to trust that they will have access to their money once it is put into an account. Many of these resentments and fears are carried down from generation to generation, across country borders. Financial education and outreach are key in overcoming those feelings of indignation.

“It’s in all our best interests to lift those people up, educate them about financial services and about how money works because then they become better consumers, and they put their money back into the economy instead of spending it on fees and ridiculous interest rates and things like that,” McDonald said. “If they stay oppressed and in debt and constantly scavenging for money and constantly living on the fringe, nothing good can come of that. That’s not a powerful consumer position to be in.”

Bill Dana, president and CEO of Central Bank of Kansas City, said he attributes his bank’s success (of handling a customer base with varying levels of financial aptness) to working with people in the community and gaining their trust. Central Bank does business with a number of different ethnic and racial groups, Dana said, including people who are African-American, Mexican, Puerto Rican, Costa Rican, Ecuadorian, Nigerian, Sudanese, Somalian, Iraqi, Saudi, Asian (a large number of Laotian and Vietnamese), Belarusian and Ukrainian.

“Since we have so many nationalities that we service, we’re respectful of multiple cultures and ethnicities,” he said. “Hopefully that shows in how we treat people.”

To better serve their customers, many of Central Bank’s staff members are bilingual, and information about services and offerings is available in multiple languages. The bank staff strives to create an atmosphere that is not intimidating to customers — going as far as having a casual dress code. Proving your consistency to a community helps gain its trust, he said. Once the trust is formed, customer loyalty follows. Dana noted that Central Bank’s best form of advertising has been word of mouth.

Working with a customer base previously under or unbanked is a niche Dana admitted is not necessarily practicable for all banks. Central Bank has created special products and services, provided financial educational classes and had to adjust regional rules and programs to cater to the various ethnic and cultural groups it supports.

“That No Hats, No Hoods, No Sunglasses rule [initiated by the Missouri Bankers Association to prevent bank robbery] doesn’t work in our situation because we’ve got tons of folks here where that’s part of their culture — whether that’s a full-face burqa, where you can only see their eyes, or headdresses or turbans or other things that would make upholding that rule not feasible in the geographic we serve. That’s an adaptation we make that might not happen with other banks.”

Whereas institutions like Central Bank of Kansas City approached their communities’ underbanked population on their own, many other banks have joined forces with local non-profits, government groups and various financial organizations with a more holistic strategy. Dozens of cities across the nation have embraced “Bank On” programs, which started in San Francisco in 2006. The programs, which are all loosely based on the original San Francisco prototype, follow the basic pillars of advocating financial education and providing the underbanked population opportunities to open low-cost (if not free) bank accounts.

Bank On Memphis, which was launched by the RISE Foundation of Memphis (a non-profit organization promoting financial education and self-sufficiency) in coordination with many of the city’s financial institutions and the St. Louis Federal Reserve Bank’s Memphis branch, is faced with the challenge of attempting to help the city’s 96,000 unbanked or underbanked population.

Based on surveys conducted with people who are likely to be under or unbanked, Corky Neale, director of research at RISE, said responses showed that many people feel as if they simply do not have enough money to be banked.

“Lots of people have been burned by banks before,” Neale said.” They got in over their heads, got overdraft fees; or they may have gotten kicked out of the system.”

Neale traces much of the city’s underbanked problem back to “a deep-seeded untrust of financial institutions, banks in particular.” Though this wariness may be generations old, “it has sticking power and has been carried from person to person.”

In asking people where they seek financial advice, Neale said, across the board, the answer is parents or family members — people who are not necessarily the most informed sources to give counsel about banking.

“We’re approaching this a bit different from other Bank On programs,” Neal said. “We’re not asking people to show up at their banks or financial institutions. We’re working through a whole gaggle of non-profits that have some kind of relationship with these potential unbanked people. We’re asking them to offer a tidbit of financial education.”

The various non-profits (which will be given training from the RISE Foundation on how to teach financial information) will be presenting basic education like how to manage an account, open an account and evaluate financial institutions to determine which one will meet the needs best.

“We’re not wanting the non-profits to say ‘you should go to this bank,’” Neale said, “Instead, we want them to teach people how to choose their banks.”

Cadence Bank — with a five-state footprint, including Tennessee, Mississippi, Alabama, Georgia and Florida — is participating in the Bank On Memphis initiative. Bill Stemmler, vice president and community development officer for Cadence, said he thinks the city’s proliferation of payday and title lenders and overall lack of financial education are what contribute to the city’s underbanked issue.

“If you can get people to come to the bank and access finances in a normal environment and get comfortable doing that and not be intimidated, then I think that helps everybody,” Stemmler said. “Plus, it reduces their cost of handling their money on an ongoing basis because if they’re going to a payday lender or a place and cashing their checks, it’s costing them thousands of dollars every year. And many of them will never get out of their cycle.”

Promoting education is the only way to break the cycle — perhaps making financial education a requirement for high school and college would help, he said.

So how does a bank start from scratch and approach its underbanked population? McDonald offers these tips as a preliminary springboard:

Assess your local market. Learn and study who your local market is, including the demographics, population trends, population changes, growing/declining areas. The first step is understanding how your footprint has changed or what your footprint is today.

Identify high-potential opportunities. Banks have to look at their communities and figure out what groups they could be serving — who are the people they could be talking to? What is the best return on investment?

Get to know what that target needs. Don’t guess. Figure it out by doing surveys, getting involved with the community, talking to people and doing focus groups. Do not make the mistake of guessing what the consumer needs instead of actually finding it out.

Diversity within this country is here to stay. With under and unbanked populations staggering, these people have become an easy target that just needs to be approached with the right strategy — communication, cultural awareness and respect, and a willingness to share information. Arming people with financial education will make them smarter consumers who can better contribute to the economy.

A question McDonald poses to banks: Will your business be one of the first to capitalize on this or the last?

Alex Peak is assistant editor of BankNews.

Copyright © May 2011 BankNews Media



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