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The $169 Billion Hidden Market: People without Banks

Targeting the 9 million “unbanked” households in the United States.

Title: Perdido en la Traducción [Lost in Translation]: The Opportunity in Financial Services for Latinos (PDF)

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.

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