The FDIC study – take two.  In my last post, I focused on the unbanked and some misconceptions about that group.  Today I’d like to focus on the underbanked — those households that have a deposit account but rely on non-bank financial services.  These are households that are already bank customers but are also using alternative financial services (AFS).  The FDIC study provides great insight into what those AFS products are – good information for a bank that’s looking to improve cross-sales to existing clients.

The vast majority of AFS products used by the underbanked are non-bank money orders (81%) and check cashing (30%), both of which can be done at the bank.  So why are customers going somewhere else for these products?  In the case of money orders, almost 58% of the participants in the study cited convenience (the place they used was more convenient than a bank) and almost 28% cited cost (banks charged more).  In the case of check cashing, convenience was the most cited reason at 55.6% followed by “to get money faster” at 17.6% (arguably another form of convenience).

Note that check cashing in this instance does not refer to payday loans – that is measured separately within the study along with usage of various non-bank credit products.  Approximately 40% of the underbanked participants had used one of the following non-bank credit products: payday loans (16.2%), pawn shops (15.8%), rent to own (RTO – 13%) agreements or refund anticipation loans (RALs – 13.2%).  The #1 reason the underbanked participants cited was that it was easier to get a payday loan or borrow from a pawn shop than it was to get a bank loan.  I’m not sure how much we can do about that given that banks aren’t particularly into relaxing their credit policies right now.  There is, however, at least one credit union that offers payday loans to its members – the benefits being a reduced rate (as opposed to  traditional payday loan providers) plus the confidence of using a trusted financial institution.

One notable missing item from the FDIC study — interestingly, the study did not include remittances in its measurement of AFS products.  With remittances at $420 billion to date in 2009, this product set makes up a substantial portion of financial service center (FSC) profits and a number of banks have announced formal remittance products in the last 18 months.

Overall, the study is invaluable for learning about the unbanked and underbanked populations but we are also required to look beyond what is written.  We also have to think about the AFS products not mentioned to make any real progress in making the unbanked banked and making the underbanked more banked.