A new report from the Center for Financial Services Innovation suggests that products and services marketed to unbanked and underbanked consumers could represent a huge and growing market for the nation’s credit unions.
The organization’s “2011 Underbanked Market Sizing Study” found that the nationwide market for services to underbanked and unbanked consumers, which the organization defined as “those consumers whose financial needs are not fully served by traditional financial institutions,” at $78 billion, an increase of 7% over 2010.
Market leading products in this sector included subprime credit cards (39.4% of the market), payday loans obtained over the Internet (32.4% of the market), and open-loop prepaid cards both payroll (21.8% of the market) and general purpose reloadable cards (21.6%)
The largest revenue generator for the segment were subprime auto loans, which generated $27 billion and represented more than a third of interest and fee income generated by the segment. Subprime auto loans also grew at the rate of 9.9% in 2011, CFSI reported.
The report broke the unbanked and underbanked financial product and service market into categories. Very short-term credit products include overdraft loans, payday loans pawn shop loans and loans made against refunds from tax returns. Short-term loans, include subprime auto loans, rent to own arrangements, installment loans, subprime credit cards, secured credit cards and auto title loans.
Together these two categories accounted for $61.5 billion of the $78 billion, with the balance spread among different payment products and services including prepaid cards, payroll cards and remittance services.
The report also suggested that opportunities exist because how these products and services are delivered is changing faster for unbanked consumers than for consumers which have relationships with financial institutions.
For example, online and mobile banking services are often introduced even more quickly to unbanked or underbanked consumers, the report pointed out.
Financial products which are able to use increasingly inexpensive internet and mobile infrastructure such as general purpose re-loadable cards, payroll cards and payday loans obtained over the internet have been growing quickly while products which use older technologies have been losing market share.
“We expect this trend to continue next year as access to mobile technology by underbanked consumers continues to grow,” the CFSI said. “Underbanked utilization of mobile phone services at the start of 2012 outpaces the mass market as a whole. Ninety-one percent of underbanked consumers have a mobile phone and 57% of these consumers have a smartphone, compared to only 87% and 44%, respectively, among all consumers.”
Of course, accessing that market can be complicated and the CFSI report didn’t offer any guidance, however the organization has been working with some credit unions to develop pilot projects that other credit unions might emulate.
One of these is the 352,000 member, $3.3 billion Redstone Federal Credit Union, headquartered in Huntsville, Ala. Redstone has launched a CUSO-owned subsidiary check cashing firm aimed to both serving unbanked consumers immediate financial needs as well as influence them to join the credit union.
“For the nearly 4 out of 10 Alabamians who do not use traditional banking organizations, Right Choice Money Services offers a welcome and competitive alternative,” said Joseph Newberry, CEO at Redstone Federal Credit Union. “Right Choice is not only good for the consumer; it’s good for the community. And Right Choice is the right thing to do.”
The credit union cited an FDIC survey from September of this year which reported that almost 193,000 Alabama households did not have a checking or savings account in 2011. and that nearly 40% of all households in Alabama use alternative financial services, such as check cashers or payday lenders. The proportion of households that used such services in the last 12 months increased in Alabama and seven other states around the country, Redstone added.
Right Choice Money Services is different from its competitors because it offers its customers a pathway to traditional savings and credit products through its partnership with Redstone, the credit union said.
Peter Alvarez, general manager for the credit union’s effort, said the project is slated to have two stores eventually but has opened the one to start. The CUSO made the 1,500-square-foot facility deliberately to look like any of the other check cashing facilities in the underserved area is has been given to serve so that customers can feel completely comfortable entering and using the services.
“All of our employees are Redstone staff that are leased to us so they can act both as front line Redstone staff and Right Choice staff,” Alvarez explained, adding that the CUSO had found being able to wear both hats is important when straddling the line between the credit union, which maybe unfamiliar to the customer, and the check casher.
“What we have found is that the people who come to us are already familiar with a bank account or a credit union account and they are not sure they want one of those or to hear about one of those,” he said. “So our staff does not overly explain or lecture or try to force the relationship in any way. We just plant the seed, give a nudge, point out as we are doing the transaction that if they did it with one of the Redstone products they might save some money. As they get to trust us more, they can come back to see us about those accounts and products.”
Alvarez said Right Choice has a customer-friendly approach for all of its products. It will accept either personal or printed payroll or government checks and by charging low fees to cash them, 1.3% for printed or payroll checks or 2.9% for personal checks.