ORLANDO, Fla. – With an estimated 20% of U.S. households considered to be unbanked or underbanked, a growing number of financial institutions are reaching out to target and serve these consumers. But "while there is an incredible canvas for innovation, there are also enormous challenges to innovate for this market segment," said Jennifer Tescher, director, Center for Financial Services Innovation speaking at a pre-conference workshop at the BAI Retail Delivery Conference & Expo on "Growing Customers and Profitability: How to Target and Acquire Underbanked Customers." If there had to be one assessment of today's financial services industry, it's that it's in flux. There is a "dizzying array" of new players emerging, Tescher observed, and unconventional partnerships are developing. All this is contributing to an environment that's ripe with innovation, but tremendous obstacles remain, she said – information is lacking, volume is hard to find, and the regulatory framework is out of date and hasn't kept pace. All this makes designing products and strategies for servicing the unbanked or underbanked that much more challenging, but the session's speakers stressed those challenges should not be a deterrent. One of those challenges, stressed Alternatives FCU President/CEO Bill Myers who also spoke at the session, is developing product models that meet these consumers where they are. " You have to meet them where they are now and make sure your products meet their needs today. Unlike consumers who have relationships with traditional financial services providers and make long term plans, liquidity is a priority for the unbanked consumer who plans mostly day to day. For them, liquidity outweighs the cost of services," he said. With $50 million in assets and more than 7,500 members, Ithaca, N.Y.-based Alternatives FCU's field-of-membership includes seven upstate New York counties 20% of which are small businesses, 67% are low-income, and the balance are non-profits. " The hard part of the process of serving the unbanked is getting people to come in the door," said Myers. "These people have made a decision to use alternative banking services, so getting them through the door takes a lot of work." One method Alternatives FCU offers is a Credit Path Strategy that provides a continuum between poverty and self-sufficiency. There are four stages in the strategy the credit union takes the unbanked consumer through: transactor – the consumer uses check cashing, bill payment and money transfer products; savers – lower balances and regular deposits; borrowers – building a positive credit history; and owners – the member owns a home or business. Myers explained that the "step-up products" are designed to encourage unbanked consumers to move up to higher levels. You need to set up building blocks for them, he said. "The idea of unbanked consumers saving money represents a fundamental shift in how they think about life. It represents their faith in the future," said Myers. Another product that Alternatives offers unbanked consumers in its FOM to open new accounts with the credit union is VITA. The service provides free tax returns and free direct deposit. The CU also waives the minimum balance it typically requires to open a share account until the member receives its tax refund and provides low-cost refund express loans. To date, Alternatives has saved taxpayers in its FOM more than $76,000 in total tax preparation fees, opened 60 new member accounts, and filed 904 tax returns in the 2004 tax season that resulted in $1.3 million in tax refunds. Central Bank of Kansas City CEO Bill Dana Jr. has been using stored value cards as a way to offer banking services to the unbanked consumers in the bank's demographics. Chartered in 1950, Central Bank of Kansas City is a designated minority-owned financial institution by the U.S. Treasury. Its primary market is mostly low- to moderate-income households with about 25% of the residents below the poverty line. The market area contains economic and housing hot zones as well as an Empowerment Zone and an Enterprise Zone. Hispanics make up more than half of the bank's market. Central Bank has been recognized by the Community Development Financial Institutions Fund (CDFI) for its investment in distressed communities, and for the past six years the bank has been granted awards under CDFI's Bank Enterprise Award Program. Dana explained that the stored value card is the first step for the unbanked to establish a banking relationship. When identification issues and a lack of or poor credit or banking history can be obstacles for the unbanked, stored value cards have reduced ID requirements and promote cash management. Central Bank's stored value card is the first of its several solutions for serving the unbanked. Other products include personal spend cards and payroll cards. "It's incumbent on us to spend research and development dollars to help serve the unbanked market," said Dana. To those financial institutions that cite state and federal regulations as being obstacles to serving the unbanked, Dana stressed that, "Regulatory issues are ongoing and won't lessen in intensity. Those same regulators want you to have outreach efforts and provide services that our current products aren't delivering." Myers emphasized that, "This market hasn't been adequately explored. That's what makes it so exciting. "This is a huge and growing market. Ignore this market at your own risk," he said. -

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