As much as the U.S. economy has recovered from the nadir experienced in the Great Recession during this decade so far, inequalities and disparities still exist among its participants - not all of which can simply be attributed to the consequences of capitalistic competition. This has led to growth within the demographic of American consumers who can be categorized as "underserved" in a financial sense. Those who use little or no banking or credit services and products, known as the underbanked and unbanked, account for more than 20 percent of the nation's population, per survey data from the FDIC.
"A notable portion of the U.S. population can be classified as financially underserved."
That said, not all of those who qualify as underserved can be called underbanked. Businesses and lenders that hope to reach Americans within this category will need to fully understand its ins and outs, and must also learn the financial habits of these individuals. Looking into less conventional metrics of assessment for the financially underserved, such as an alternative credit report from PRBC, may also be beneficial.
Properly classifying underserved Americans
In its recent study of those with significant financial difficulties in the U.S., the Center for Financial Services Innovation divided the broad category of the financially underserved into subcategories:
- Consumers with low or volatile incomes (like contractors whose pay rates can quickly fluctuate).
- Those who have little or no credit, or a FICO score below 650. (This group is sometimes called the "credit invisible.")
- Individuals who meet the FDIC criteria for being underbanked or unbanked. The former use bank accounts but do so sparingly, while the latter have no accounts or conventional credit whatsoever.
Overlap exists between all of these groups on a fairly regular basis: Many of the credit invisible have only one (sparingly used) bank account, for example. However, specifically defining each category is essential.
After classifying these consumers appropriately, the best method of appealing to the underserved demographic is to understand the financial services that have actually appealed to them in the past. CFSI's research found that in 2016, short-term loans and credit - specifically, products with repayment terms of one to two years, or rates renegotiated month to month - earned $59.7 billion in fee- and interest-related spending from the underserved, more than any other loan type.
However, long-term credit was right on its heels, with $51.7 billion in spending during 2016. This may indicate a growing trust of financial institutions among members of this consumer group. It thus behooves lenders to adjust their product catalogs as needed to broaden their customer base.
Eschewing short-term credit
Payday loans and other forms of credit with short repayment terms earned a bad reputation over the last several years due to various lenders' unscrupulous practices. As a result, it's little surprise that CFSI noted a decline in spending on these credit products among the financially underserved. It's vital not to underestimate these consumers and treat them with respect by offering products at fair rates, which will keep lenders in compliance with new regulations.
More than anything else, the best way to invite underserved or low-income consumers into the fold as your customers is to think outside the box and not be limited by FICO or Vantage scores. Credit decisioning tools from PRBC can be a major boon to this task and help develop better perspectives on individuals with lower incomes or less-than-perfect credit.