"As banks transform their business models to address a new marketplace, they need to examine the potential of the underserved market as new revenue streams are necessary due to increasing compliance costs and various fees coming under pressure as a result of regulatory reform," said Carl Carande, national account leader of KPMG LLP's Banking and Finance practice. "In the current environment, we see heavy competition among banks chasing customers with high credit scores, with decreasing margins, leaving the underserved market for those willing to invest in it."
Carande also says that banks, before moving forward, need to ensure that appropriate risk-protections are built-in for the bank and customer. "Risk management is a key element of the early opportunity assessment phase, as banks review their current state and design a portfolio of business opportunities for both the near-term and short-term," said Carande. "From there, it is a matter of creating a target operating model before moving to the end game of deploying a multi-generational plan."
Customer Segmentation Critical
According to the KPMG study, banks can pursue a range of key target segments among the underserved, ranging from those who do not use a bank to young adults with little knowledge of financial products.
The KPMG study categorizes the underserved market into the below four key target segments:
- Unbanked (age 18 - 40; income of $12,000 - $35,000): Typically recent immigrants who are hourly workers and required to prepay most expenses. They are predominantly users of cash and money orders and regularly transfer funds to a foreign country.
- Rebuilder (age 30 - 55; income of $50,000 - $150,000): Typically a consumer that has recently experienced a negative event such as unemployment, foreclosure or bankruptcy, but held an above average credit score before this event. They use at least one checking account, lack savings or monetary resources, use payday loans, and have limited access to credit cards.
- Work-to-pay (age 18 - 30; income of $18,000 - $40,000): Typically an hourly worker that has a low credit score and difficulty maintaining a consistent job. They regularly use payday lenders to meet cash flow needs, buy and use stored value cards, pay cash for cars or have above average interest loans, and are comfortable using a debit card.
- Emerging retail (age 18 - 26; income of $25,000 - $60,000): Typically a recent high school or trade school graduate with limited access to liquidity and a paid-off older car or high interest car loan, but diligent in paying bills on-time and at saving. They use mobile phones and online services heavily, are receptive to advice and new ways to manage their money, and are willing to pay fees for conveniences.
"Customer segmentation is critical to serving the underserved market and each target segment requires a disciplined and strategic approach," said Timothy Ramsey, managing director in KPMG LLP's Performance and Technology Advisory group. "Those banks that carve out a niche that makes sense -- and can successfully market and brand themselves accordingly -- will distinguish themselves from the competition."
"When serving this market, banks also have an opportunity to establish customer loyalty by helping these customers more effectively manage their personal finances and develop better saving and investing habits through educational, financial literacy programs," said Ramsey.
New Product Offerings
Several examples of new product and services that banks can provide the underserved market are highlighted in the KPMG study. Some services relevant for the unbanked segment include international wire/card transfers, check cashing (for non-customers), and walk-in bill pay and personal transfers. For the underbanked segment, secured credit cards (savings account secured credit card), courtesy advances, and general purpose reloadable cards are some potential services highlighted.
"The KPMG study indicates that the underserved market is growing quickly because millions of wage-earning adults are unfortunately moving from the 'average' credit score to the 'damaged' credit score category due to negative events," said Atif Zaim, financial services sector leader for KPMG LLP's Performance and Technology Advisory group. "There are a number of services that banks can offer this segment as they recover or move up the value chain."
"Banks may also need to reach the underserved market by distributing these new products and services via ethnic- and cultural-focused marketing programs," added Zaim.