Over the last few posts, we defined the underbanked, unbanked, and credit invisibles. We posited potential limitations of traditional banking in servicing these consumers. We then detoured slightly to demonstrate how traditional credit scores may be losing their relevancy for addressing the credit needs of the prime and near prime consumer. A few weeks ago, we took a more in-depth look at the credit invisibles and unscorable consumers by more specifically defining the different reasons why an unscorable or credit invisible consumer matters. Now let’s zoom out a few thousand feet and refocus on the broader topic of “Financial Health.” From there we can drill down into the different segments of the population that require different treatments for their financial ills.
In June, the Center for Financial Services Innovation (CFSI) hosted their annual EMERGE conference with the focus on “Consumer Financial Health.” The conference theme was augmented with presentations of the next “Big Idea.” Organizations of all stripes were actively discussing product and technology innovation, and public policy focused on the plight of the underbanked and the strategies and tactics to solve for them. A lot of great ideas were being bandied about by many startups, non-profits, think tanks, and new technologies to provide solutions. Many traditional financial companies were taking notes and sharing some of their efforts to address the issue.
However, I also heard another buzz… an underlying issue of why people are unbanked. More than one person told me many of the unbanked do not trust the banking system−specifically calling out Millennials and Immigrants.
WHAT DO YOU MEAN?!?! YOU ARE CHOOSING TO BE UNBANKED?
The recession has made many Millennials incredibly skeptical of the banking system. They have grown up living through the impact on their families. As for Immigrants, there is an inherent distrust of the system because many have come from countries that have nationalized the banks and taken their money from them. These two groups have made a conscious decision not to participate in traditional banking. Technology is not the answer for them as it is just construed as a more efficient way to separate them from their money. Let’s call these two groups of people the “opt-outs” and nothing but time, experience, or a significant event will motivate them to participate in traditional banking.
For the majority of the unbanked, it is about access (or lack thereof) to traditional resources and the chance to prove their worthiness. We have seen tens of thousands of examples of how a significant portion of the credit invisible population has been able to participate in affordable banking and lending practices. In fact, some presenters at the EMERGE conference discussed results that have shown these formerly unscorable consumers now have very good credit scores and have escaped the cycle of debt. IT IS TIME FOR TRADITIONAL LENDERS TO TAKE A MORE ACTIVE ROLE.
This is a call out to traditional lenders to ramp up efforts and serve these consumers. You do not have to be altruistic and create unprofitable products. There are some companies who are “cracking the code” and have figured out how to serve this segment profitably and with more reasonable costs to the consumer. My challenge to these organizations is to try something new and make a commitment to go beyond what has always been done. But do not leap in blindly. Obviously. Explore, research, and test additional data attributes to better define and expand your customer base.
By seeking data outside the traditional models, you can profitably grow your business and help keep the regulators off your back. You can lead the effort in finding additional revenue streams for your business. And with the intrinsic value to society and this issue, the next visit from regulators could yield positive feedback and praise for treating customers more favorably and inclusive with your financial services offerings.
Come visit LexisNexis® Risk Solutions to learn how our alternative data and analytic services are empowering lenders to develop affordable lending and banking solutions for the unbanked and underserved markets.