Wednesday, July 20, 2011

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.  


  1. There is also a problem with the way in which business thinks about this community and who provides assistance. My firm is launching a business aimed at delivering $100 billion of allocated but uncollected federal and state income support to America's working poor, and although the tools exist to do this work, no one who spends significant time thinking about how to serve this population has considered the big levers that are available. The schism between the non-profit and policy world and the world of big business is so broad, that huge opportunities, like the one we're working on have simply been missed.

  2. Thanks for the comment Ben. Where can one learn more about your work?

  3. The Ford Foundation has funded us to build a business plan and a business rationale, which we are in the midst of drafting. I'm happy to send anyone an executive summary which is a little bit dated,but gets to the thrust of the work we're doing and follow it up with a call.

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