The underbanked, those who rely somewhat routinely on alternative financial services, make up a more lucrative potential market for big banks than one might think, according to a recent study.
The Center for Financial Services Innovation, in partnership with Core Innovation Capital, released a report this week detailing the market value of underbanked customers. According to their research, in 2010 alone, underbanked customers paid an estimated $45 billion in banking fees and interest. The CFSI and CIC put the report together to “investigate the large and diverse revenue opportunity from financial services in the underbanked marketplace.”
Growth in Extending Credit to Underserved
The lion’s share of this revenue, about $27 billion, came from the credit portion of the financial industry, with overdraft fees making up nearly $7 billion of that segment. Other popular forms of credit extended to the underbanked included rent-tow-own merchandise financing ($5.1 billion), payday lending ($4.7 billion), and internet payday loans ($2.7 billion).
The report shows that not only are underbanked customers a market worth tapping in to, but that they’re also a growing market. According to the study, revenues from issuing credit to the underbanked grew 2%, and revenue from payments collections grew by 6%.
The biggest grower in the credit segment was internet payday loans, which grew by 35% year-over-year. In payments, prepaid cards showed the strongest year-over-year growth, with 33%, followed by payroll cards (25%) and walk-in bill pay services (12%).
Check Cashing on the Decline
The report also shows that revenues from more traditional forms of alternative banking services are on the decline. Tax refund anticipations loans were down 18%, and check cashing was down 5%.
The CFSI and Core Innovation Capital both work in the interest of underbanked Americans, a group they estimate to be about 60 million strong — almost one in five Americans. The CFSI is a nonprofit research group that tries to compel the financial services sector to better serve underbanked people; Core Innovation Capital is a venture capital firm that invests in financial services companies that serve the underbanked.