Market Forces and the Underbanked Consumer

The blog piece I wrote a few weeks ago about “Understanding the Underbanked Consumer” generated an interesting comment on one of the discussion sites I posted it to.  The commenter asked "why market forces don't bring new competitors into a segment that spends $29 billion each year on financial services” especially since these underbanked consumers seem to be only asking for “basic things like clear communication, simplified products, and respect in exchange for their business.”

It’s a good question.  Part of the answer, I believe, is that the lower-income market segment is very expensive to serve.  Providing “clear communication, simplified products and respect” is a high-touch proposition and there isn’t much upside in this market segment for traditional financial service providers.  Higher end products sold through on-line media are much easier and cheaper to sell, and higher end clients can be “cross-sold” higher value, higher margin products such as investment services, insurance and small business loans and services.   

Secondly, it must be recognized that the lower-income segment is inherently more risky and engaging in high-risk, low-return business activities is not something shareholders or regulators tend to appreciate.  The FDIC may claim that it encourages the banks it regulates to make “small dollar loans” to low income clients.  However, when the examiners show up they often criticize banks for making loans to low-income borrowers and require them to increase reserves for such loans.  Regulated financial service providers are actually “dis-incented” from serving the low income consumer. 

Consequently, despite the requirements of the Community Reinvestment Act and the desire to demonstrate good corporate social responsibility, mainstream financial service providers are primarily located in higher income communities.  Pay-day lenders, or as they prefer to be called, alternative financial service providers, are left to fill the void for financial services in low income communities.  Even worse, according to this interesting report, some of the largest mainstream banks actually fund the predatory business practices of the pay-day lenders! 

It needn’t and shouldn’t be so.  Mainstream financial institutions can partner with social ventures focused on serving the working poor to bring services to financially stressed lower and middle income consumers.  One good example is Emerge Workplace Solutions, a for-profit social venture that works with employers and mainstream financial institutions to provide financial wellness coaching and credit products that assist workers re-build rather than destroy their credit. 

In these challenging economic times workers are increasingly living closer to the financial edge.  They must pay more for health care, higher tuition for their children and increased contributions for their retirement.  Their ability to save for life’s emergencies has been greatly constrained, making them all the more vulnerable to “alternative” lenders when emergencies do arise. 

The Emerge Workplace Solutions model is designed to bring scale to the high-touch business of providing financial services to the low income market segment.  It is a rare catalyst for bringing market forces to bear on the issues facing the underbanked consumer.  

Families in Distress

It is never easy to look poverty in the eye.  Even when it is some poor benighted street person whose poverty seems self inflicted we want to turn away and pretend he or she isn’t there.  But with the economy continuing to wallow in the doldrums of an at best anemic recovery, families are falling into homelessness to levels not seen since the Great Depression.  According to this shocking report seen on the program “60 Minutes” 25% of children in the United States now live in poverty.

The stories of these innocent victims of economic hard times are almost unbearable.  Imagine going to school so hungry you will ask another student for the food they may not want to eat themselves.  Or having to get on a school bus in front of a cheap motel where your family has moved after losing your home to foreclosure.  Or enduring the shame of seeing you father stand by the side of a road with a sign that reads “Family of Five, Please Help.” 

8 million families and 16 million children in distress in America is overwhelming social welfare systems and charitable organizations struggling to provide needed assistance.  As individuals, we feel powerless to help.  Last year I wrote about Home & Hope, a non-profit organization in San Mateo County that is specifically designed to engage individuals in the effort to assist homeless families. 

I can say from personal experience with this organization (I have joined the board and have spent the night with some of our families in a shelter) that we can and must become personally involved in creating solutions to the tragedy of families becoming homeless in America.  The Home & Hope/Family Promise model keeps families together while helping them to reconstruct their lives and transition back to employment and housing. 

Witnessing the bravery of the children is especially humbling.  Listen to the boy in the “60 Minutes” piece state with such conviction “as long as you’re with your family you will make it through this…all of it.”  Or the young girl say “when things get better we know there will still be people struggling and we will be able to help them.”  We must find it in us to respond to such courage.  Family of five, please help.