Remote and branchless banking has led to a lot of changes in the industry, one of which is an increase in the amount of un and underbanked individuals. Branchless banking is generally defined as enabling access to bank accounts through sources other than classic branches. The term “underbanked” has been increasingly used as a public-relations based expression for people who cannot get a loan or who have poor credit. In recent years, the Federal Deposit Insurance Corp. (FDIC) published a study qualifying 51 million Americans (or 1 out of 5 households) as being underbanked. Another 17 million are “unbanked” which means they do not have a bank account at all. There are certain implications that come along with a person or entity being given this title by the government and ways that banks can adjust strategy for these individuals.
Signs That Someone is Underbanked
This question is more confusing than it appears as the definition of “underbanked” seems to constantly be in flux and regularly debated. The Center for Financial Services Innovation defined underbanked adults in 2008 as people who “may have a current checking account and/or current savings account if the individual made one or more non-bank financial transactions in the past 30 days.” This changed about 5 years ago when the FDIC adopted its own broader definition of term extending 30 days to a year.
Currently according to the FDIC, the test for being underbanked is:
Having a bank account
Having sought financial services at somewhere other than a bank at least once in the past year (i.e. a money order or a wire transfer)
Why is it Bad?
Mitchell Weiss, an adjunct professor of finance at the University of Hartford Conn. believes that, “The unbanked and underbanked are more likely to fall victim to the high-rate predatory side of the industry, like payday, account-advance, tax refund-advance and structured, settlement-advance loans, to name a few.” Some believe the changes in definition are simply to keep people inside the system, and banks should not be seen in this light.
How Does It Relate to Branchless Banking?
First, any compound word beginning with “under” implies that there is a certain amount of whatever they are lacking that would be considered enough. Many people believe that banks play too large of a role in our lives and feel that we are overly reliant on them and almost held hostage. So who is to say how much involvement with banks is enough? Given the rise of technology, this has resulted in many choosing to use virtual/branchless banking options and alternatives such as agents. Has this caused the definition of “underbanked” to change from what it once was? Time will tell but it is entirely possible. The banking process is less than pleasant and it would not be surprising that while convenience increases, direct interaction with banking institutions lessens if not ends completely and more alternatives present themselves every day. Therefore branchless banking can ultimately reduce the number of underbanked by providing a balanced alternative.
What Should Banks Do?
Nowadays, non-bank financial services can actually be more relevant and beneficial for consumers than traditional bank services. It’s up to the banks to be fully aware of and understand the wide variety alternatives that consumers have. This way they can design products that have a compelling value proposition. The can also encourage people to “join the system.” This will enable them access to benefits in the future, such as showing evidence of savings to gain credit access in the future.