What Banks Can Learn, and Earn, from Underbanked Customers

Underbanked customers often turn to payday loans and check cashing to meet their financial needs. Now, FinTechs are beating banks to this untapped market.

I’m checking out at Target, my new air fryer bagged and ready to go, but something is wrong. A one-word message I’ve never seen before appears on the POS screen: DECLINED.

The cashier raises an eyebrow, but her tone is polite. Would I like to try a different card? I turn down the offer, leaving the $200 kitchen appliance behind as I excuse myself past the other people in line to make a call. In minutes, I’m talking to Capital One—the very bank that just acquired my tech consultancy—and explaining my situation. Yes, I know my credit limit is just $3,000 but I have money in the bank.

After a complicated divorce, my credit score was down in the low 600s, and even that $3,000 credit limit took time to get approved. The hurdles I ran into during that time were eye-opening and dramatically changed the way I looked at low-credit customers.

Low Credit Scores Aren’t an Anomaly

Fraud flags like the one I experienced exist for a reason, of course. They mitigate risk based on data about low-credit customers. However, they also drive a wedge between customers and their financial service providers.

This wedge drives people to exploitative check cashing and payday loan operations to meet their financial needs. These businesses charge the highest rates allowed by state law, anywhere from 5% to 30%. Yet, since twenty-five percent of US households are either unbanked or underbanked, and forty percent of Americans can’t pay for a $400 emergency out of pocket, these operations make a killing. Twelve million Americans use payday loans each year, most taking multiple loans a year to pay for basic expenses while feeding a $90 billion industry.

By letting these customers slip through the financial cracks, banks are missing out, too. With an intelligent, data-driven approach, banks could connect meaningfully with these customers, manage default risk, and earn revenue on reasonable lending rates.

Nearly two-thirds of US adults have bad credit. That’s a lot of customers. Banks that don’t offer financial services to these customers are missing out on a huge segment of the market.

Where Banks Leave a Gap, FinTech Startups Fill In

As for cash flow, popular account app Chime offers immediate access to deposited funds—faster than the usual two-day wait with traditional banks—with no fees. Chime makes a profit through a partnership with Visa. When Chime customers use their Visa debit card, merchants pay a percentage of the sale to Visa, and Chime takes a portion of that percentage. Chime also offers customers high-yield savings accounts and uses those funds to invest in high-return assets.

For customers who feel gouged and ostracized by the risk-mitigation tactics of traditional financial service providers, apps like Earnin and Chime meet a critical need. For millions of people in the US (and billions internationally) who have fluctuating income, high debt, low credit, or are living on government assistance, it can feel like these apps are the only reasonable financial service providers out there—and fintech startups are scooping up that revenue.

It doesn’t have to be that way.

Banks Can Step Up And Mitigate Risk

Yes, the bottom end of the market is risky. People default on loans, deposit bad checks, and misuse credit at higher rates, leading to loss. But banks have one thing startups don’t: the data to minimize their risk. With a more accurate assessment of a customer’s financial situation, banks can offer more favorable lending rates, new subscription-based bundles, and informed financial products at significantly less risk.

Banks already use data to improve services and make lending decisions. Customer insights like income, on-time bill payments, saving habits, spending habits, major life events, and more could be used to expand these practices to more customers and provide reasonably priced financial solutions for everyone.

The top five US banks own nearly half of the industry, so there’s no denying that they possess enough data about customer needs to compete with FinTech companies. All it takes is the will to do it.

Following in FinTech’s Footsteps

Where should banks start? I’d say the best place right now, ironically, is fintechs. Top fintech companies experiencing success and opening lots of customer accounts have clearly figured out what at least some of these customers want and need. Banks should examine their brand’s positioning and find ways they are uniquely suited to meet the needs of these customers. Thanks to their size, banks have the ability to watch the market, evaluate demand, and take appropriate action. 

Imagine what fair access to financial services could do for customer loyalty down the line. Offering realistic rates to people at every level of financial health is certain to build the kind of trust and long-lasting relationships banks are known for in the current market. With the help of partners like Kunai, banks can build and execute a digital strategy to reach a broader market.



Sandeep: Tell me a bit about the early part of your career.

Tom: I spent a decade helping to build start-ups focused on application and database software. This was where I learned how to sell and do business development. I was fortunate to be part of one company going public and another being sold to IBM.

Sandeep: What is something you learned during this time that helped you with consulting?

Tom: I began to appreciate how different customers achieved varying levels of success with the same foundational technology. This made me understand just how critical getting your team and process right can be.

Sandeep: This is something I only came to appreciate years into consulting, especially after the sale of my first consultancy to Capital One.I saw teams in different parts of the company trying to solve challenges like real-time messaging. Same corporate culture, same technology, same internal support mechanisms. Night and day outcomes.

Tom: We saw a lot of the same thing after selling our practice to EMC (sold to Dell in 2015). This is probably the thing I'm most proud of when it comes to the teams I've helped to build: the ability to perform well in a variety of contexts, sometimes in ways that inspires the client team to up their game as well.

Sandeep: Yes. It's particularly cool to see your team succeed in individual ways after an acquisition...consulting skills definitely translate into the corporate environment.

Tom: Totally. We have people who've stayed on at Dell and risen up the ranks, while others took the opportunity to become successful executives at other Fortune 100 companies....or to start their own agencies and startups.

Sandeep: We've both been around a while. My first consulting project was a Y2K thing for Cisco back in 1998. You've been around a little longer than that :). How do you think consulting has changed most during the past five years?

Tom: I think because there is so much infrastructure available now, consulting has become more delivery and outcome-oriented. A better blend of strategic and tactical. Public Cloud has also enabled velocity to increase at a pace unfathomable 5 years ago.

Sandeep: What has stayed the same?

Tom: It's still mostly about people. People who thrive on change and are focused on their personal and professional development. I love that this has not and will not change...it's what I love about consulting.

Sandeep: I know you're adjusting your work style to COVID. You're still a dude who clearly prefers to drive an hour for a socially-distanced hike or outdoor meeting over Zoom any day of the week :) But personal styles aside, what is specifically compelling about a remote agency during the era of COVID?

Tom: Kunai has been remote for years, which gives them an inherent advantage. There is something about the communication and management styles that just works in a way that other organizations are still figuring out.

Sandeep: Yeah, I think what a lot of people fail to realize is that remote work isn't just office work over Zoom. it's an entirely new paradigm. There needs to be an understanding for asynchronous efficiency...and this just takes time and effort to develop. How do you approach remote work and family? What are you learning about separating work and personal time?

Tom: No matter what the form of interaction, Focus. Be present. Quality over quantity. The best weeks are the weeks where I proactively schedule work and personal time. Neil (Kunai's Head of Delivery) shared a great quote with me "With discipline comes freedom." When I am proactively addressing the majority of my professional and personal commitments, I find I earn a little flexibility. A little freedom.

Sandeep: Tell us about a business hero of yours that I may not have heard of before.

Tom: Paul O'Neill is someone you may not know. His work in both the public and the private sector created a profound impact

Sandeep: We are both over forty years old :). How have you learned how to work smarter during the past decade or so? What do you wish you knew about consulting when you were 25 that you know now?

Tom: Consultants want to make lasting change. Lasting change is often not the act of a single person. Today I work much harder bringing others along on the journey.

Sandeep: Last question. What are you doing here? :) Why join a small consulting company this late in your career when you could have a cushy job somewhere else?

Tom: I love a good challenge personally and professionally. When I turned 40, I decided I would run a 10K every Thanksgiving weekend and try to have my finishing time be less than my age. With the exception of one year where I did not run due to a health issue, I have met the goal. I also recently completed the Leadville 100 Mountain Bike race. So, I guess I'm here because I'm a glutton for punishment :) Jokes aside, our customers have a job to do and I intend to put Kunai in a position to execute flawlessly on their behalf. I love committing jointly to audacious goals for our customers and our business.

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