CFSI Emerge Conference: Inclusion and the Lending QuestionNitin Sumangali |
The US underbanked population in 2008 (i.e., pre-crisis and pre-Durbin) was about 40 million households (roughly 35 percent of the total number of households) or 106 million individuals. This includes both those people who have no current checking or savings account as well as those who may have these accounts, but made one or more non-bank financial transactions in the past 30 days. Some more key facts about this group: in 2008 forty-seven percent of this population was employed full-time, 11 percent were employed part time, and in 2012 they paid approximately $89 billion in fees and interest.
These are some of the surprising things I learned in Los Angeles at EMERGE, a forum about the underserved and underbanked in America hosted by the Center for Financial Services Innovation. One thing became clear: there’s no shortage of smart driven people who are developing ways for consumers to improve their financial health.
Examples: Alex Horowitz from The Pew Charitable Trusts discussed the research his team was doing in the area of small-dollar lending and how it impacts borrowers. Representatives from non-bank financial services companies like Ken Rees of Elevate and Joseph Coleman of Ritecheck talked about serving the needs of a consumer base in a sustainable way. The big takeaway for me was that a lot of people are exploring ways to make borrowing flexible and manageable for consumers, especially given that they’re paying almost $90 billion in fees and interest a year.
The discussion also reminded me about some work Global Insights produced a few years ago. Back in 2010, we developed content showing how banks really made money: by offering their customers liquidity for a price, paid either by the bank in the form of interest on deposits or by the consumer in the form of interest on a line of credit. Cards offer that liquidity at the point of sale. Simply put, banks pay customers to deposit money with them and charge customers to borrow money from them. In return they let them access money when and how they want.
For those who borrow with credit cards, the ability to get personal, unsecured loans at the point of sale represents a means to manage cash flow and plan big-ticket purchases—or emergencies. At a conference dinner, I spoke to some bankers about the panel discussion on personal unsecured loans, and the bankers noted that it’s not top of mind when they think about how to serve customers, even as those panelists talked about the small-dollar lending market being a white hot topic these days. This made sense to me, as credit cards serve this function for banks already. But they’re not thinking about credit cards as serving the customers in this market. Global Insights wrote about this years ago, addressing ways that banks had to rethink their credit card business as part of their overall relationship with consumers, rather than just a distinct business with its own P&L needs.
For banks looking to add value, reevaluating the role the credit card is in order. Cards have been an essential part of the financial mix for consumers who need quick, small-dollar loans at reasonable fees. And it can be a way to address that $89 billion in fees being paid at last tally by the underserved sector in the U.S.