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(originally published by Booz & Company)


The $169 Billion Hidden Market: People without Banks

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.

Bottom Line:
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.

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