Authors: Gregory Fairchild (University of Virginia) and Kulwant Rai (Tayloe Murphy Center)
Publisher: University of Virginia Darden School of Business, Tayloe Murphy Center
Date Published: June 2011
For years, banks have experimented with winning over “bottom of the pyramid” consumers in the U.S., and many have concluded that the effort was too risky and not lucrative enough. This article suggests that some different approaches could prove more successful in attracting deposits from the millions of households that have no relationship with a bank or credit union. The rapidly growing Latino population is particularly underserved, the paper finds.
The researchers spent a year studying the issue — combining field interviews in Virginia, an analysis of nationwide data from the Federal Deposit Insurance Corporation (FDIC), and a case study of a North Carolina–based credit union — to “give the financial services industry, policy makers and market watchers information they can use and a real measurement of the scope of this hidden market,” according to one of the paper’s authors, Gregory Fairchild.
The researchers first analyzed data from the FDIC, which in 2009 sponsored a survey on the banking status of almost 50,000 U.S. households. That survey defined “banked” households as having at least one adult with a checking or savings account, “underbanked” households as those that had a bank account but also relied on alternative providers such as “payday” lenders and check-cashing services, and “unbanked” households as those in which no adult had a relationship of any kind with a financial institution.
According to the FDIC data, about 7.7 percent of U.S. households (or a little more than 9 million) are unbanked. On average, these households have annual earnings of US$18,600, resulting in an estimated $169 billion in income that never flows through a bank or credit union. About $52 billion of this total is earned by the 2.5 million unbanked Latino households nationwide, which have an average annual income of $20,800.
Although the researchers stress that all unbanked customers, regardless of demographics, can be targeted by financial institutions, several factors make the Latino population particularly attractive. Many Latino households feature more than one adult generating income, and the group’s workforce participation is high — for example, an estimated 90 percent of Virginia’s adult male Latinos are in the labor force, compared with 74 percent for all male Virginians. Latinos are also the fastest-growing ethnic group nationwide — the U.S. Census Bureau reported that the number of Latinos grew 24.3 percent from mid-2000 to mid-2006, to 44.3 million. (The national population growth rate during that period was 6.1 percent.)
Some unbanked Latinos are undocumented aliens, who would have trouble opening an account without a Social Security number. But many others are just put off by deposit requirements and language barriers, and turn instead to check-cashing stores and payday lenders that cost more to use.
To understand the steps that financial institutions could take to win over these customers, the researchers performed a case study on the Latino Community Credit Union (LCCU), which opened for business in Durham, N.C., in 2000. Since then, LCCU’s membership has soared, reaching 53,073 in 2009; customers are served through 10 branches. LCCU requires a very low minimum balance (just $10 to open a savings account), and it accepts photo identification from any country, although a depositor needs to present a Social Security or tax identification number to earn interest. The credit union also offers small loans and international remittances.
To find out whether the LCCU approach was financially sound and sustainable, the researchers compared its progress and status with a peer group of six credit unions also established around 2000.
The researchers found that LCCU, as compared with the peer group, experienced “impressive growth” between 2001 and 2009 in such key areas as assets, loans, and deposits, even though 97 percent of its members had low income and 75 percent had no banking experience before joining. LCCU was the second-highest among the peer institutions in generating income. And although low-income populations are often considered to be high credit risks, the researchers found, by comparing LCCU’s ratio of nonperforming assets against loans with that of its peers, that the credit union was not overly exposed to defaults. Across several measures of profitability — return on assets, total interest income divided by assets, and operating income return on investment — LCCU was performing well compared with its peer group. The researchers concluded that LCCU “provides a solid example to the business community for helping minority low-income groups while also generating profits.”
Financial institutions seeking to follow in LCCU’s footsteps should carefully consider its approach. For openers, banks and credit unions should hire more employees who speak Spanish, educate staff members on cultural issues, and help customers with paperwork.
The workplace may be the ideal conduit for acquiring unbanked customers, the researchers write, because of the large working Latino population. Banks should offer incentives to employers to bring staff members to the bank, or hold “sign-up” days in workplaces during which the benefits of banking — especially the absence of check-cashing fees — are promoted.
In interviews with Latinos in Virginia, the researchers found that 90 percent cited “convenience, familiarity, close locations, extended hours, the ability to speak Spanish, and speed in sending remittances to Latin America” as major factors in choosing where to conduct their financial business. The researchers advise bank managers to closely study the service model offered by South American tiendas: These multipurpose stores provide cash and international transfer services and also sell food.
Finally, the researchers argue that bank managers should get out the message that bringing large numbers of unbanked households into the system lowers the risk of crime. Because unbanked consumers carry cash or keep it at home, they are often the victims of violent robberies. According to the researchers’ analysis, each time LCCU opened a branch in North Carolina, the number of robberies in the local area fell and property values went up.
About $169 billion in annual income is generated by consumers who have no formal connection to a bank or credit union. Nearly a third of that total, $52 billion, belongs to Latino households. Managers of financial institutions should consider employing one of several culture-specific strategies to woo this potentially lucrative and rapidly growing market.