Financial Services and the Underbanked

Meanwhile, there is a huge sector of Americans who have infrequent or nonexistent relations with financial institutions. This group of “unbanked” Americans comprises more than 13 percent of the 105 million households in the United States. The unbanked are typically immigrants, ethnic minorities, the youth, widows, divorcées without credit histories in their own names, and people who have filed for bankruptcy and are re-building their credit-worthiness. At first glance, the unbanked may seem like an unattractive market, and banks until the last few years have for the most part ignored them, leaving them to rely on alternative financial service providers, such as check-cashing outlets.

Banks are now paying attention to the huge opportunity that the unbanked market represents. The “mainstream” already-banked market is thoroughly saturated with financial products and services, so much so that mailboxes have become filled with credit card offers, and various loyalty programs by financial vendors to retain and add-value to existing customers. Financial institutions are looking for a new frontier of customers, and they are easily finding it in the unbanked.

The 2000 Census served as a catalyst, showing huge changes in the country’s demographics. One million immigrants arrive to the United States each year. Hispanic- and Asian-American populations in the United States are projected to grow by 258% and 267% respectively between 1995 and 2050, compared with just 50% for the country as a whole. By 2050, it is expected that Asian-Americans will comprise 9 percent of the total U.S. population, up from 4 percent in 1995. Growth among Hispanic-Americans will be even greater - they are expected to comprise 22 percent of the total population by 2050, up from just 9 percent in 1995. The overall purchasing power of Americans in 2002 was $8 trillion, 20 percent of which was from ethnic minorities. It is estimated that this purchasing power figure will grow to $10 trillion by 2007, with ethnic minorities accounting for 22 percent of the total.

This study focuses on unbanked immigrants and ethnic minorities, whose spending on financial products and services will increase by 94 percent in next 4 years. It describes the unbanked as a market segment and explores the reasons why this segment has been reluctant to develop relationships with banks. The rise of immigrant and ethnic banking in the last decade will be explored, as well as innovations in credit-scoring models that can include the unbanked in FICO scoring, allowing them to build credit. A wide range of financial services and products targeting the unbanked are identified, as well as how they are marketed. The research concludes with recommendations about how financial institutions can increase the effectiveness of marketing to the unbanked, as well as how to measure that marketing investment.