When it comes to lower income and underserved consumers, the chief challenge facing some mainstream credit unions and banks may not be how to serve them competitively but whether to serve them at all.
Some analysts argue that consumer banking is increasingly moving toward using technology and communication platforms that may become steadily less available to lower income consumers.
With the constant changes in the marketplace, some financial institutions are also finding it necessary to assign fees to the sorts of services that primarily lower income consumers use in order to offset their costs. This will likely only increase the barriers to access for consumers who have already shown little appetite for paying banking fees.
“What we need to comprehend is that the future of technology in financial services is no longer in the future,” said Brett King, author and financial services consultant. “The future is now. We are in the future.”
King is the author of Banking 2.0, a book that depicts the changing market for financial services as technology meets changing consumer demands. This is particularly true for convenience, a demand which King estimates will drive the market for at least the next decade.
“There will be very little, if anything, that will trump the desire for convenience,” King told an audience of over 500 credit union executives attending CO-OP Financial Services THINK 2012 conference in Boca Raton, Fla., in April.
King illustrated his point by showing the THINK attendees a video of an 18-month old infant interacting with different sorts of communication technology. In the first minutes of the video, the infant is shown playing with a tablet computer, using the icons to move images on the screen, smiling and squealing in delight. In subsequent minutes of the video, the infant is given two different types of magazines. Rather than treat them as magazines by flipping the pages and looking at the pictures, the infant treats them in the same way she did the tablet computer and looks up frustrated from the effort.
“Clearly, for this child, magazines are merely iPads that do not work,” King told the audience. “The future is happening right now and we have to prepare to meet it as financial institutions.”
The effort to meet consumers demand for convenience, King explained, may mean financial institutions will continue to move more of their consumer banking services to mobile phones, smart phones and other electronic platforms so that they will be able to obtain financial services no matter their timing and location. Most consumers actually enter a bank or credit union branch as little as two or three times year and some not that often, he pointed out, adding this trend will likely continue.
David John, a financial services analyst and expert at the Heritage Foundation, a primarily conservative think tank, agreed with King that the trends toward both convenience and technology will likely continue. However, neither banks nor mainstream credit unions have addressed the need for banking platforms or other technologies that might be available to lower income consumers.
“It's a fascinating question and I don’t think we have yet seen it answered, but I remain optimistic that it will be answered,” John said.
His optimism is rooted in the likelihood that few mainstream credit unions or banks will develop their own proprietary technologies or platforms for lower income customers to use due to the expense of doing so, but will instead license these platforms from technology companies which will find the broader financial services market sufficiently large to justify the investment.
John also acknowledged that those technologies have not yet been developed and until they are, steadily larger numbers of lower income consumers may find themselves using third party financial service providers such as payday lenders, check cashing firms, title loan firms and large retailers for basic financial services.
The largest and most familiar of these is Walmart, the Bentonville, Ark.-based retailer that offers products and services to primarily lower income consumers who lack relationships with financial institutions. The products include check cashing, check printing, bill payment and money orders, domestic and international transfer services and ATM services. The retailer also offers prepaid cards and prepaid card reloading, a credit card issued in partnership with Discover Financial Service as well as a proprietary charge card good in Walmart stores as well as VISA, MasterCard and American Express branded gift cards.
Sarah Spencer, Walmart’s director of corporate communications, said the retailer merely wanted to provide another service. “We know that many of our customers either don’t have a bank account or are poorly served by banks given the costs and service issues they find with them,” Spencer wrote in a response to questions about Walmart's retail financial products. “Walmart’s goal is to provide these unhappily banked or unbanked customers with affordable products and services that help take care of their everyday money service needs such as cashing a check, transferring money or paying a bill.”
John largely applauded the efforts of Walmart and other financial service third party providers but agreed that, compared to some financial institutions, all those entities can provide is something of a financial dead end. Other than a credit card loan issued with in conjunction with another firm, Walmart cannot offer loans or any of the other mechanisms that might help lower income consumes climb the financial services ladder. John pointed out that a few years ago, Walmart applied for a financial services charter through a mechanism provided by the state of Utah but was blocked from doing so.
The current emphasis on having financial institutions be the primary providers of payment and financial transaction services is largely out of step with the rest of the world, John said. He recounted a story from this past summer where, while traveling in Britain, he needed to have some reimbursement funds added to his bank account. John said his British hosts were perplexed at how many steps he had to take to get this relatively simple task accomplished. Had he been in Britain, a firm would have sent a text message to his bank authorizing the transfer.
“But of course, that can't happen here because we haven’t implemented text message transfer yet,” John observed. He also noted that in certain African countries, the chief means for conducting financial transactions is the cell phone – not a smart phone or a fancy mobile phone – but a cell phone with text messaging enabled.The service is widely accessible, inexpensive to use and familiar to almost everyone, he said. However, the provider is a telecommunications company. One organization that is watching these developments closely is the National Federation of Community Development Credit Unions whose member credit unions serve a predominantly lower income membership. Pablo DeFilippi, NFCDCU director of membership, sees the potential challenge but is optimistic.
“Cellular phones, particularly in the immigrant communities, are already widespread and popular,” he said.