Two neighbors share a fence but never speak. One is convinced the other is nosy while the other is convinced the first is unfriendly. A storm blows the fence down. Forced to interact, they discover their assumptions were wrong. Banks and the unbanked often share that same broken fence.
A new Federal Reserve study suggests the truth lives somewhere in the middle and that simply understanding each other might be the first step toward a relationship. So, what is this proverbial fence, exactly, that is keeping banks and the underbanked apart?
The Fed recently took a stab at understanding what puts so many consumers off when it comes to banking and what attracts them to alternative financial methods. It found that complaints about fees and fears of hacks were among the most important factors that kept people away from banks.
Although the Fed's research draws on a small sample of just 36 focus group participants, it provides valuable insight into the perspectives of unbanked and underbanked consumers.
The Demographics of Unbanked and Underbanked
An estimated 14.2% of American households (19 million households) are considered underbanked, which is defined as those who may hold checking accounts but still use non-bank methods like payday loans to deal with their finances. While the number of unbanked has fallen recently, it still represents 4.2% of households.
That means almost one in five households are either underbanked or unbanked, which could translate to a large block of potential new customers for creative community bankers.
The Fed survey offers some clues about what members of this group think, and thus the kinds of services and banking practices that might attract them. The Fed said its results mirror some broader surveys and studies into the unbanked and underbanked population.
The Fed said its effort provides some additional depth into the thoughts and feelings of Americans on the banking sidelines.
Details of the Fed Project
The effort was run by the Federal Reserve Bank of Cleveland, which engaged a third party to run the focus group project. There were two groups of 10 in Houston and two more groups of eight in Cleveland. Each group session lasted two hours.
Half of the total group members were unbanked and half were underbanked. More than two-thirds were employed. Only three had incomes below $15,000, while two-thirds earned between $15,000 and $49,999. There were nearly twice as many female participants as male participants, and more participants identified as Black or another race than as White. The median age was 40-49 years old.
What the Focus Groups Found
- Cash is still kind with this group. They liked its immediacy, the lack of fees in using it, the ease in knowing exactly how much you have to spend. Some noted that they liked the privacy of cash, as opposed to accounts that can be tracked and hacked. But they also noted that cash can be stolen or lost, and that it is not universally accepted anymore.
- Various alternatives were popular, including prepaid cards, fintech tools, and money orders. Among the underbanked, bank debit cards and credit cards received positive marks, although some used credit cards just for emergencies.
- Hacking fears were a top concern and not just related to banks. Participants worried about hacks and scams with cash cards and payment apps as well.
- When it came to banks, the biggest turnoffs were hacks and fees. The unbanked in particular said fees charged by banks were a major deterrent.
- Several cited negative experiences with banks, including having their accounts closed.
- Others complained about the long and confusing process of opening accounts.
- The lag time for deposits to clear banks was another issue.
- On the plus side, participants cited the importance of having bank accounts in gaining credit or in making applications, and they appreciated the convenience of branches.
The Fed noted that the small size of the project means it may not be representative of the views of all the unbanked and underbanked. On the other hand, the small size and intimacy can yield “valuable insights" to better understand their opinions and the reasons behind their choices.”
The unbanked and underbanked have real issues and concerns about banks. Understanding those concerns can be useful to CFIs who may be seeking to extend accounts to this large demographic.
