The Underbanked

Low income Americans need a new “bank”

9 million US households (7%) don’t have bank accounts (unbanked) and 24.5 million households are underbanked. Even more stark, roughly 19% of African American households and 16% of Latino households are unbanked. (Source: FDIC, 2015)

Once a hallmark of financial stability, many consumers shun bank accounts all together for alternative solutions. But where are these customers seeking financial services? And what opportunity is there for a viable alternative?

Framing the problem

The fact is, modern financial tools no longer serve lower income individuals.

In 2014, Americans paid nearly $32 billion in overdraft fees. Banks that used to predominantly get their income from (highly volatile) interest rates have since diversified their revenue streams through convoluted fees including monthly balance minimums, overdraft fees, account maintenance fees, returned mail fees (yes, returned mail) and even human teller fees. Most of these fees, ironically, target those that don’t have the money to pay them.

There is a distrust of banks among lower income earners. And rightfully so. The fee structures are opaque and deliberately designed to hurt them. The result is consumers looking for a reasonable alternative.

The alternative

The bulk of options out there aren’t great. I won’t go into the details of prepaid cards (though advise checking out this article for further reading). But the primary alternative is to use a Check Casher (an $11 billion+ industry). These businesses are renown for their predatory fees and yet they are still a preferable solution for perfectly rational customers.

This comes down to three main reasons. Low income individuals would rather (1) pay a predictable and consistent fee (2) get their cash immediately, rather than it being held in limbo and (3) have a personal relationship with the tellers that they know and trust.

Partial solution

Other solutions, like Square Cash, have enabled their customers to use and send money without having to connect a bank account and even recently launched a physical card to better enable customers to keep their cash on their platform and spend it directly from Square Cash.

Perhaps most importantly — while they make their revenue off of fees, they charge a humane 1% to get cash withdrawn to your account immediately and $0 for most other transactions.

But their product is still somewhat predicated on the existence of a checking account and hasn’t (yet) closed that loop. — You cannot, for example, deposit a check to your Square Cash account.

The opportunity for startups

Banks will never revert back to their traditional model. Fees are too addicting and the volatility of interest rates too vast. In their wake, they’ve left a huge opportunity.

Essentially, there needs to be an ethical digital check casher — a full service financial product with reasonable and transparent fees.

We need a solution that allows users to deposit checks and turn them into cash at reasonable rates, charges a modest premium for immediate access to capital, easily enables users access to their money, and incentivizes customers to save more.

Note: if you’re interested in additional reading, I recommend checking out the book, “The Unbanking of America: How the New Middle Class Survives