In the past few months, there’s been a flood of news related to a term not many people are familiar with: the underbanked. There is still a big debate about where the term comes from…some say it was coined by the big four banks in an arrogant spirit (“if you don’t do business with us, you are underbanked”) and others use it as an acronym for proverty.
The fact is that almost one-third of the US population (63 million adults) conducts their financial transactions outside the mainstream financial system using services like check cashing, walk-in bill payment, remittances and payday loans, to name a few. Even though this has been a reality for decades, just a few months ago Senator Elizabeth Warren (Massachusetts) pointed the finger again with an interesting report in which she claims that almost 30% of the US population spends about the same on financial services as they do in food (estimated to be 10% of total income). Ten percent of total income equals almost $3,000 a year, generating a $89 billion industry known as alternative financial services or AFS.
Like the Frankenstein monster that turns against his creator, the regulators inadvertently created the AFS industry which is now growing at skyrocketing rates, having gained 5 million new customers in the past four years. Here’s some data to give you an idea of AFS and its costs:
It appears that suddenly, Wall Street (with some pressure from regulators) is looking closely at this demographic:
- American Express hired Academy Award-winning director Davis Guggenheim to produce a 40-minute movie to inform the public opinion about this issue (and of course, to sell a few Bluebird and Serve cards)
- Capital One announces it will accept more customers from this underserved segment
- Facebook appears to be going for the remittances market (check my post on that analysis here)
- Wal-Mart deploys a nationwide check-cashing program
The big question is why? And why now? For decades, the US financial system has claimed it isn’t possible to serve this market due to high transactional costs and low margins…and suddenly a change in tone. Why?
There are three major trends that by acting together, create fertile grounds for serving the underbanked: 1) 75% of this demographic are now using smartphones, 2) 70% of this demographic are power social media users, and 3) Big data + social underwriting trends are maturing. All of these factors make it possible to reach, underwrite, serve and maintain a customer base that historically has been operating at the edge of marginalization.
We will soon see a world in which almost everyone has a smartphone. As a case in point, yesterday while walking in San Francisco, I came across this free cell phone program. Is this underbanked market going to be served by corporate America? Or will an innovative startup grow to become the alternative for the so-called “base of the pyramid” customers?
This is the question Silicon Valley is trying to answer…