The continued existence of underbanked and unbanked households remains a significant social problem – one that credit unions are in a unique position to help solve. Through mission-aligned partnerships and technology adoption, credit unions can turn this social challenge into a growth opportunity to increase membership and increase revenue. Credit unions that make the effort to meet this challenge will not only improve the financial health of their community, but their own as well.
Who are the financially underserved?
According to the Federal Reserve, 63 million, or 22%, of American adults are either unbanked or underbanked. The general view of the traditional financial services industry is that this population is too risky and expensive to serve. However, the rapid growth of alternative financial service providers like payday lenders and check cashers, which exclusively serve this population, clearly proves otherwise. In 2021, payday loan industry revenue was $18.2 billion, while credit union revenue totaled $85.3 billion. Whereas unsecured consumer loans represent less than 10% of the overall loan portfolio of credit unions according to the NCUA (the majority of which is mortgages, auto loans and commercial real estate loans) but 100% of the portfolio loans from payday lenders, it could be argued that payday lenders are already making more money serving the underbanked than credit unions serving the banked in the same product category.
Credit unions can take over this market from payday lenders. Having created an online platform to provide affordable financial products to underserved people, I see success stories every day, where credit unions and their former underbanked members both come out on top. People with no credit score can successfully get approved for a short-term installment loan at a maximum annual rate of 18% (compared to 400-500% for payday loans); Credit unions providing such loans can successfully attract new members and keep their default in the single digits. By sharing best practices from these successes, credit unions can follow suit and help more underbanked consumers become productive members.
Partner with non-profit organizations
Unbanked and underbanked consumers are concentrated in low-income communities. These people are often people of color or new immigrants. Many, scarred by years of overdraft fees and insufficient funds, do not trust financial institutions to have their best interests at heart. Many don’t understand the credit union model and don’t know that they are not-for-profit organizations, owned and operated by their members.
Nonprofit organizations that already serve these communities can bridge the trust gap and spread knowledge about the unique benefits of joining a credit union. Service organizations in the following categories are some examples:
- financial advice;
- Affordable housing;
- Workforce development;
- Professional associations belonging to minorities and women;
- Help for people with disabilities; and
- Settlement of refugees and new immigrants.
These organizations share the same interest as credit unions in strengthening the financial health of the communities they serve. For those already committed to these organizations, obtaining a low-interest loan or opening a deposit account with a low minimum balance provides an attractive incentive to complete a program such as training. professional or financial education. For nonprofits, partnering with a credit union offers their community a safe path to financial prosperity. For credit unions, partnering with such mission-aligned organizations provides both an extensive referral network and an effective vetting process for recruiting new responsible members.
Adopt the right technology
Technology can break down barriers to reaching potential members and helping build lasting relationships. For unbanked and underbanked people living in a “banking desert,” smartphones are often the most convenient and reliable way to access banking services immediately. Technology benefits credit unions by reducing processing time and costs and providing resources that can be used to reach even more members or further improve in-person service.
Technology is not a one-size-fits-all solution, especially when it comes to serving the underserved population. Rosa Franco, director of loans at Neighborhood Trust Federal Credit Union ($18.7 million, New York, NY), understands this by serving her vibrant and diverse community in New York’s Washington Heights neighborhood, where 71% of the population speaks a language other than English and 20% live below the poverty line. Franco said that because a large portion of the financially underserved still have a lot of gaps in their banking knowledge, they “find it difficult to use technology to transact. For these reasons, we need flexible technology, user-friendly, adaptable and, of course, affordable.”
To choose the right technology to reach and serve the unbanked and underbanked, a credit union leader should ask themselves the following questions:
- Does it support multi-channel communication and allow seamless transition between in-person and online services?
- Will it support and facilitate staff interaction with members or will it hinder and restrict it?
- Is it easy to customize and update based on changing member demand?
- Does the contract bind the credit union to a long-term commitment that can be potentially costly?
Unlike banks, which are measured primarily by the size of their assets, credit unions are defined by the strength of their members. While unbanked and underbanked people may not bring large amounts of assets, these people have large cash flows and need help managing them. Alternative financial service providers responded to this need, but charged exorbitant fees and kept consumers in a cycle of perpetual debt. Credit unions can serve this population in a way that is much more beneficial to society, and in doing so can also grow.
Kate Hao is the Founder and CEO of Happy Mango, a New York, NY-based data technology company that focuses on consumer credit risk assessment and serves community banks and credit unions.