By George Hodges, Managing Director, New Market Partners.  
New Market Partners works with financial institutions to provide alternative banking solutions and is a Sponsor of CFSI’s Underbanked Solutions Exchange.

To quote Steven Covey’s perennial best seller 7 Habits of Highly Effective People, “Seek first to understand, then to be understood.”  The foundation for a “win-win” customer relationship, right?  Easier said than done when dealing with underserved financial services customers.   Even the terminology is a barrier.  We have conducted extensive primary research with these consumers, and I’ve never heard anyone say, “heh, I’m underbanked.”

If you want do some quick consumer research for yourself, try it out on a young adult, which I did last week with my college age daughter. Ask what they need to be “fully banked?” They probably won’t understand that, so follow with “how do you want to be able to use that debit card you carry around with your iPhone?”  The answer I got was, “Well, when I get some money, like a check from you, I need it right away, and it has to be available immediately, just like cash, but on my card. Then I like to check my balance from my iPhone before trying to pay for something so I won’t be embarrassed if my card is rejected, and I usually wait to pay my bills until I get the check because I don’t have any extra money, and you know I HAVE to reload my iPhone or my life would end.  Then I say, “great, you are clearly underbanked!  I happen to be an industry expert on this, let me explain how we can solve that problem.  First of all, you need to find $1,500 and give it to the bank, like a security deposit. That’s the key to a fully banked relationship. After that, you won’t have to pay $12 a month just to carry your card, and with the bank holding your extra money, you will feel safe signing up for free on-line bill payment. Now, about those checks you get. When you deposit them into your account, your mobile App will probably say you have the cash available like you want, but there is this thing called Reg E, which means it is really a pending item, so you might overdraw, which your bank may or may not cover, depending on whether you decided to opt in, and then debit card transactions work differently….”  Just as I am getting warmed up I realize I lost her at having $1,500.  She looks at me and says, “that seems pretty complicated; maybe I’ll just go to Wal-Mart.”  Just kidding about her last response, but you get the idea.

The primary barrier to retail financial institutions serving the “underbanked” is a mis-perception of the market.  Maybe we need a new term to describe this market segment.  According to Webster the word under means inferior or beneath, so translated literally underbanked means “beneath banking.”  That traditional perception of the market is probably not the best starting point for deeply understanding the needs of the next major growth opportunity for your financial institution.

Consumers have a rapidly expanding number of options to access financial services.  The clearly-defined barriers between an “underserved” consumer who does not “qualify” to be banked in the traditional way, and the young/tech savy/mobile/just-in-time consumer who is simply looking for other ways to access their financial services has blurred.  Only by spending the time to really understand the needs of your (Alternative Banking/Banking 2.0/Just-in-Time/whatever you want to call them) customers can you get past those narrow definitions and move on to the real opportunity of fully serving your customers in a profitable way with products that meet their needs.