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© CFSI, 2008. Not for distribution.© CFSI, 2009. Not for distribution.

Financial Services for Low and Middle Income Americans

Opportunities for Working Families: A Leadership Forum for State Lawmakers Kimberly Gartner June 22, 2009

©CFSI, 2009. Not for distribution


72 million 64%

21.6 million 19%

18.5 million 17%

Unbanked

Underbanked

Banked

40 million U.S. households are financially underserved. These households include 106 million individuals: 52 million unbanked and

55 million underbanked.

Underbanked Market Size

Total unbanked and underbanked

(Percentage of U.S. Households):

36%


Underbanked Market Opportunity

$25 billion spend on financial services• $6 billion spend on credit• $4.6 billion spend on payments• $2.9 billion spend on transactions• $11 billion spend on investing

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Underbanked Credit Scores

Credit scores were appended for 79% of survey respondents:

• 25% had a prime credit score• 42% had thin or no credit file

• These consumers cannot be scored

• 33% were considered subprime

Underbanked Credit Scores

No file31%

Thin file11%

A- Super Prime

7%

B- Prime Plus 9%

C- Prime9% D- Non- Prime

14%

F- High Risk19%

Underbanked ≠ Subprime

Source: CFSI Underbanked Consumer Study, 2008


Why Do Financial Services Matter?

Basic financial services are a critical step on the path to asset building and financial opportunity.

• Consumers are more likely to save and own assets if they have access to and participate in account-based financial products and services.

A bank account is a significant factor in predicting whether individuals own certificates of deposit, car loans and mortgages.Low-income households with bank accounts were 43% more likely to ownother financial assets than households without bank accounts.

• Yet basic financial products are often designed, marketed and delivered in ways that fail to meet underbanked consumer needs.

Financial education as a stand-alone activity is not sufficient to overcome unresponsive products, and is more effective when coupled with opportunities to put learning into action.

• When consumers’ short-term financial needs aren’t well met, their ability to save, access credit and build assets in the long run is compromised.


Industry Evolution Presents Opportunities & Challenges

Signals new market opportunity – and need for changeDemographic shifts

Increases competition and introduces new economic models

Demonstrates demand, profit potential

Expansion of non-bank sector

Generates awareness of unbankedGovernment initiatives

Creates new access points, efficiencies in service deliveryTechnological advances

ImpactMajor Change

Environmental Factors


7

Macro Economic Observations

©CFSI, 2009. Not for distribution

1. The economy is negatively impacting this population because they work in retail and construction industries at a higher than average rate and they are being impacted on the employment front.

2. The economic crisis is pulling the attention of low-income consumers onto more immediate/urgent/dire situations—housing, jobs, etc.—which might make it more difficult to engage them on a new product or service.

3. The economy is widening the unbanked space with previously banked consumers, resulting in a slight increase in new prepaid customers.

4. While a vast majority believe that saving is more important now than in the past, they also believe their ability to save has become more difficult in the recession.

5. However, amid all of the reactions to the economic crisis, there is an overlaying sense of hope for the future among consumers given the election of Obama.


• ID requirements that overstate risk

• ChexSystems, credit checks

• Lack of cultural awareness• Inappropriate marketing

messages• Poorly designed delivery

channels

• Lack of transparent pricing• Failure to meet customer

liquidity needs

The supply gap: Lack of alignment

• Workplace-based outreach• Self-service technology• Retail/non-branch distribution

Marketing & Distribution

• Just-in-time education• ITIN, matricula acceptance• Second chance programs• Alternative credit

reporting/scoring

Risk Management

• Prepaid debit cards/checkless checking

• Transactional services as acquisition tools

• Small-dollar credit

Products & Pathways

Promising innovationsKey success factors

Closing the Supply Gap


Products & Pathways: Credit

Mountain Association for Community Economic Development (MACED) has developed an employer-based alternative payday loan product for residents of Kentucky and Central Appalachia

Save It! Loan features include:• Loan amounts range from $300-$500 depending on income• Funds disbursed directly into checking account or on a prepaid card• 10-month term; 18% APR• Appalachian Federal Credit Union is the lender• Savings component that results in an additional 50 percent of the amount

borrowed going into a savings account at the credit union with an optional employer match

Employer coordinators assist with online applications and provide financial education information

Increasing emergency loan options for lower-income consumers


Products and Pathways: Credit

Progress Financial• Unsecured credit to Hispanic

families who lack FICO scores and established banking relationships

• Proprietary alternative risk assessment system; based on building trust and relationships

• Helps consumers build credit and gain access to “mainstream” financial services

iAdvanceTM

• From Meta (largest prepaid card issuer)

• Small line of credit for prepaid cardholders who have payroll direct deposit; automatic loan repayment on payday

• Underwriting based on relationship data as well as traditional credit score data

• Goal of pricing 50-80% below non-bank lending rates within three years

• Next: amortized/installment product


Products & Pathways: Prepaid

The Product: Walmart MoneyCard• General Purpose Reloadable (GPR) Visa debit card available through Wal-Mart

retail locations • Designed to provide the underbanked with the “advantages of a

checking account”• Provides in-store, online, and mobile support services (reloads, balance

inquiries, etc.)• No overdraft fees• Recently reduced all transaction fees to $3 (vs. prior fees ranging from $4-$9) in

response to the economic downturn• Partnership with GreenDot allows cash reloads


Obstacles to Innovation

Despite significant innovation, challenges remain.

• Understanding the consumer• Making the business case • Reaching the consumer • Finding and managing partners• Managing regulatory uncertainty


Recommendations for Policy Makers

© CFSI, 2008. Not for distribution.© CFSI, 2009. Not for distribution. ©CFSI, 2009. Not for distribution

Kimberly GartnerAssociate Director

The Center for Financial Services InnovationA Nonprofit Affiliate of ShoreBank Corporation

2230 S. Michigan Ave., Suite 200Chicago, IL [email protected]

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