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The Underbanked and the Unbanked

Preetam Kaushik

NEW YORK (MainStreet)—Rob Levy inhabits a part of the U.S. financial industry far removed from Wall Street, that famous (and sometimes infamous) stretch of the U.S. financial market. He is Director of Research for the Center for Financial Services Innovation (CFSI), an organization focused on meeting the needs of the underbanked customer–a term used to categorize customers whose financial needs are not met by traditional financial institutions.

It's a huge market: a recent CFSI study estimated that there were 68 million customers across 22 different financial product types, adding up to $78 billion in revenue per year.

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At the sidelines of the 8th Annual Underbanked Financial Services Forum (CFSI is a co-sponsor), being held from June 5 to 7 at the Intercontinental, Miami, Levy is driving a key message. "There is shift that the underbanked market is making from the margins to the mainstream," he said. "We see Chase and AmEx, two mainstays in financial services, making major plays in the underbanked space through release of market-leading prepaid cards."

So far, though, it has been CFSI that has shown the way to others on how social inclusiveness and financial services can mix to make for a great business case. It's come a long way from its 2002 origins as a joint project by alternative financing specialist Shorebank and the Ford Foundation to examine the gap between supply and demand of financial services for low-income people.

Levy says the project discovered that a huge number of people in the U.S. did not have adequate access to well-designed, affordable financial products and services to meet their short-term financial needs and also provide a platform for longer-term wealth creation. "Many folks were either already saving or had the potential to save," he said. "Most were transacting financial business through some mechanism, mostly informal and unorganized. At the same time, this segment was growing, and had tremendous market potential."

The CFSI stepped into the picture in 2004, when it was formally established. Since then, from distributing $6.25 million in grants and investments and publishing over 100 studies and research papers on the U.S. underbanked market, to its efforts at creating a framework of best practices for the U.S. financial industry (the Compass Principles), it has been at the forefront of the movement to improve the financial products people use to manage their daily financial lives.

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"Underbanked providers are enabling consumers to borrow, spend, save, and plan better," says Levy, who got interested in underbanked customers at the time he was doing his MBA from Yale. "As an industry we need to have conversations about the role and impact of regulation and policymaking in ensuring both consumer protection and innovation in high quality services."

His team, in research conducted jointly with Core Innovation Capital, and sponsored by Morgan Stanley, carried out a detailed study in 2011 of the U.S. underbanked financial services market. "Growth of inexpensive internet and mobile applications is fueling key underbanked products such as general purpose reloaded (GPR) cards, Payroll Cards, and Internet Payday Loans," the report noted. Taking the example of GPR cards, Levy says, "The most potent example is with the GPR prepaid cards. These products, which function like checkless debit cards, can be a preferred method for storing and managing funds for many consumers – whether it's as a better alternative to checking accounts or as an alternative to cash."

The mention of the word sub-prime may send a shiver down a few spines, but according to Levy, the CFSI's studies showed the sub prime credit card had the highest growth rate of any segment, close to 40%, year-over-year. In terms of the largest segment of the underbanked revenue market, subprime auto loans stood out $27 billion, greater than a third of the entire underbanked market.

The Underbanked and Technology

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The rapid growth of technology, from the rise of social media to mobile device proliferation, makes CFSI predict even better days ahead for the underbanked market. In a recently published report, Financial Technology Trends in the Underbanked Market, CFSI points to four trends in emerging financial technology that will impact this market. These are social media, digital payments, big data, and B2B2C (Business-to-Business-to-Consumer). Levy thinks that social media still has significant concerns regarding consumer protection and regulations to surmount, but with around 72% of low-income consumers on social media, the market is vast.

Digital payments, especially through mobile is transforming the underbanked market. Levy points to mRDC (mobile remote deposit check capture), which allows consumers to deposit checks on their smartphone and offers a real benefit to underserved consumers who would otherwise have to wait in line at the check casher to deposit a check plus pay hefty fees.

There are over 25% of U.S. customers of financial services with either no credit history or a very thin one. Estimating risk in order to provide an optimal financial solution is therefore problematic. Levy points to how companies like L2C are attempting to solve this problem through big data. "They have created over 200 million alternative credit scores, by capturing data on customers from theirutility payments, public records, and alterative financial services usage," he said.

The trend of financial technology start-ups teaming with established firms to reach out to the underbanked market is being termed by Levy and his team as B2B2C, a new paradigm to decrease cost of acquisition of new customers and enhance scalability. Levy talks about the case of BillFloat, which provides short-term lending to underbanked customers, by partnering with heavyweights like GEICO and Allstate. "BillFloat can afford to offer comparatively lower rates while still making a profit, because its model slashes inefficiencies that normally plague small-dollar credit providers."

While the market has evolved greatly from the time Levy's B-school days when he was aco-director of a student consulting team for START Bank, a startup community bank in New Haven targeting the underbanked, neither he nor anyone at CFSI is pausing to rest on their laurels just yet.

For the past three years, CFSI has beenpart of the closing bell ceremony at the New York Stock Exchange to celebrate Financial Literacy Week, a week-long series of partnership events that highlight initiatives to help improve consumers' financial capability.

CFSI has created the Innovators Roundtable, which brings together traditional and non-traditional financial firms. Participants attend formal twice yearly meetings, as well as research and market testing projects facilitated by CFSI. For mid-sized banks and credit unions CFSI hosts the Underbanked Solutions Exchange to facilitate peer-to-peer knowledge sharing and discussion about emerging trends.

It's also not shy of the "Show me the Money" approach. CFSI's Financial Capability Innovations Fund granted $1.5 million in 2011 to five non-profits engaged in projects to help low-income, underserved customers. In 2012 CFSI organized the FinCapDev (Financial Capability Development) Competition, held jointly with the D2D fund, which awarded up to $100,000 to the best mobile applications in the field of financial access and capability.

Levy, who held a session titled "Fresh Ideas for the Emerging Market at the Miami conference," is excited about the latest edition of the conference and the new horizons for his industry. "As always, the latest, let's call it the bleeding edge, innovators are all over the agenda, pointing the way to what's in store for the next two to three years."

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The financial services industry often takes a deserved rap for exploiting Main Street, but firms like CFSI are showing how the two can profit from the association.

Also see: Financial Literacy Summit Addresses Gaps in Understanding

--Written by Preetam Kaushik

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