March 30, 2017
Esther Pigg, Senior Vice President, Product Strategy FIS Payments Division
There is a paradox within the retail banking industry. Banks and credit unions tend to focus more energy and resources on serving the most profitable customer segments – those with steady incomes and credit access. However, that leaves out millions of potential customers. When almost 15 percent of Americans live at or below the poverty line, there are vast numbers of people in need of financial access. In a time of reduced revenues, financial institutions who ignore that do so at their own risk.
Retail banks make money in large part by extending credit. But a large percentage of the population lack access to credit, largely due to low incomes, excess debt or past financial management choices. To compound the revenue concern banks may have, these prospects also have higher than average needs for support and assistance with day-to-day banking, which incurs additional branch and call center costs. Under that lens, it’s no surprise this large demographic is largely underserved.
Without access to traditional banking, the underserved consumer has found creative alternatives to fulfill their financial needs, and many businesses have taken advantage of the opportunity to cater to them. Those alternatives come at a high price to the consumer. They often face exorbitant fees for the most basic transactions. Check-cashing services and paying utility bills through money orders demand high fees. Yet having a safe and affordable place to house your money and pay your bills is exactly what banks and credit unions do best.
The dynamics of what makes a profitable customer are in flux. The underlying costs of supporting a customer have declined as technology has evolved. By making the digital experience more robust than simple balance and transaction services, consumers can increasingly conduct their own affairs with little or no need for live support. Banks can offer support through texting/messaging or video chat when customers do need assistance. Increasingly, artificial intelligence bots with natural language processing are being deployed to solve many of the more routine queries with no human interaction needed.
Lower operating costs offer banks the opportunity give customers access to affordable basic banking services. Seeing the potential, financial institutions are actively launching educational campaigns that lay the groundwork for a strong financial foundation, ideally offered through the online e-banking interface. Financial literacy helps people understand the basics of money and the value of getting services from trusted low-cost providers and the importance of having credit.
The final element is credit rehabilitation. Educating consumers about making better financial choices, and making safe and affordable financial products and services accessible, results in a more financially astute consumer. One who has developed the ability to manage their economic life in a way that leads to credit access in partnership with their provider.
For the underserved community, access to affordable financial services and knowledge of how to use them, saves them from becoming prey to expensive third-party payment services for check cashing and money orders. The evolution of digital banking means that traditional banks and credit unions can lower the costs and risks of serving these underserved consumers.
As consumers spend less on those services and continue to learn about the path to credit, they are adapting their financial profile to become viable credit prospects for banks.
Credit worthiness can be a game changer for entire communities as it spurs home ownership, home improvements, stability in employment and more intangible benefits such as pride in community. The intangible benefits most commonly seen are community beautification efforts, coordinated efforts to push crime out and a shift in the aspirations of the next generation. With income savings increasing over time, a deposit customer will eventually become eligible for credit, and a once-underserved customer can begin climbing the revenue generation ladder with a financial services partner. In communities where these place-based initiatives have been focused, changes are tangible; within 12 months, average credit score of program participants have exhibited an average increase of 100 points – from 550 to 650.
Financial inclusion is a key driver to reduce poverty. Success in this space is a long game for banks. By initiating educational programs for the underserved and offering easy-to-use and cost-effective digital banking services, large numbers of people with no banking relationship can be converted into credit-worthy customers. It does not stop with credit; as consumers get more savvy, their needs grow. With financial stability, these customers are also in need of additional services such as pension planning, college saving, investments, insurance, etc.
There is a large untapped market of new customers waiting to be brought into the banking mainstream. Technology now provides the mechanisms to educate as well as the cost-effective tools to service these customers as they develop into revenue generating customers for life. Best of all, it’s contagious. Programs promoting affordable services for the underserved create a chain reaction that can transform neighborhoods and communities, generating more customers in need of the trusted services that financial institutions provide.
Senior Vice President | Product Strategy FIS Payments Division
Esther leads the Product Strategy team for the Payments division of FIS that spans debit, prepaid, credit card, merchant, network and loyalty programs. With extensive experience across the banking and payments technology industry, Esther focuses her team on developing long term product strategy for U.S. and global retail payment products to effectively engage the markets FIS serves.