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  • 5 Trends Driving Credit Union Investment in Underserved Markets

    Posted by on January 8, 2018

    The annual Financially Underserved Market Size Study, conducted by the Center for Financial Services Innovation (CFSI), illustrates the tremendous opportunity that exists to address the needs of financially underserved consumers. The study measures the size, composition and opportunity for products and services underserved individuals use to save, spend, borrow and plan.

    Here are some of the 2017 study’s highlights:

    • Underserved consumers spent $173 billion in fees and interest to use $1.94 trillion in financial services in 2016.

    • Spending by financially underserved consumers increased 6.6 percent, or $10.7 billion, in 2016.

    • The market has grown an average of four percent each year since 2009.

    The report also identifies five trends driving opportunities for financial services providers. What follows are a few ways credit unions may consider leveraging these trends to improve the financial lives of underserved consumers in their communities.

    Credit Cards
    Credit card spending among underserved consumers has grown rapidly for several consecutive years. CFSI estimates underserved consumers will spend $37.6 billion on retail credit cards, $8.3 billion on subprime credit cards and $0.4 billion on secured credit cards. Retail credit cards resemble subprime credit cards in terms of average balance and interest rates, but promotional features, like product discounts and no-interest startup periods, drive many account openings. Consumers who don’t pay off their balances quickly enough may see the cost of credit increase rapidly. The average retail credit card APR is 24 percent, and 72 percent of retail credit cards do not base APR on cardholder creditworthiness.

    How Credit Unions Can Help
    Consider mapping out a strategy to evolve your credit card offerings in a way most likely to benefit the unique underserved populations in your market. Start by identifying your existing members and prospects who fall into the underserved segment. Finding success with a credit-builder product like a secured card isn’t a quick fix. Issuers must take the necessary steps to comply with several regulations, including Ability to Repay rules. Cards and marketing teams will need to collaborate closely to execute sales, communication and, importantly, cardmember education plans. There must also be a good program in place for graduating cardmembers into appropriate products as their improving credit profiles warrant.

    Frequent Overdrafts
    Nearly 75 percent of overdraft revenue comes from a relatively small number of consumers. The Consumer Financial Protection Bureau (CFPB) reports 8.3 percent of all checking accounts experience more than 10 overdrafts in a year. In 2016, this subset of frequent overdrafters spent $24.5 billion on overdraft fees. Of consumers whose overdraft frequency is in the top 20 percent, 23.4 percent close their accounts within 15 months. Of those, 86.3 percent see their accounts closed involuntarily.

    How Credit Unions Can Help
    Educate your members on how to avoid overdraft fees, including opting out of overdraft protection, keeping closer tabs on checking account balances, direct depositing paychecks, signing up for automatic notifications if the balance drops below a certain level and setting up a linked account as a backup.

    Credit Pricing
    There are approximately 91 million U.S. adults who are credit-challenged, meaning they have subprime credit scores below 600 or are unscorable due to a lack of sufficient credit file information. Many credit products accessible to underserved consumers feature one-size-fits-all rates and fees, which means they aren’t priced according to risk.

    How Credit Unions Can Help
    Many credit-challenged consumers may benefit from alternative measurements of borrower risk to increase their access to credit. Big data makes it possible to develop much more nuanced underwriting and rate-setting techniques. Setting custom-tailored rates to fit an applicant’s credit history does require specialized expertise, but the return is worth the extra effort. This is true not just for the credit union but also for members of the local community who may be turned down for credit with traditional underwriting. Risk-based pricing allows issuers to lend to consumers of higher risk and still be profitable.

    Small Business Finance
    An annual Federal Reserve survey found between 56 percent and 71 percent of small businesses with revenues of less than $1 million failed to receive the full amount of credit requested on loan applications over the past three years. Forty-four percent of small businesses surveyed reported securing financing as a top challenge. Small businesses are increasingly seeking out non-financial institution online lenders as a source of credit. These online lenders were preferred by 26 percent of small businesses in 2016, up from 18 percent in 2014.

    How Credit Unions Can Help
    While credit access is extremely important, it represents only one piece of a small business’s overall financial health. Broader opportunity exists for credit unions to help address the full range of small business financial challenges, such as limited time for financial management, cash flow volatility and barriers to startup funding.

    Fintech Solutions
    Several product markets are feeling the impact of increased digitization. The rise of digital wire transfers and online tax filing points to the inroads new technologies are making into previously brick-and-mortar domains. Short-term credit products are primed for online channel growth that can enhance borrower control in the loan comparison and application process.

    How Credit Unions Can Help
    Ensure the digital experience your credit union offers is on par with the experience offered by your non-financial institution competitors. Many underserved populations use online and mobile devices as much or more than other segments. A recent Google study found U.S. Hispanics use online sources at a higher rate (54 percent) than the general population (46 percent) throughout the purchase journey.

    Clearly, there are many ways a credit union may be able to leverage the trends driving opportunities in underserved markets. Before embarking on a new initiative, however, a credit union should ensure the strategy aligns with its mission and target market. Doing it right requires a decent amount of work, and importantly, buy-in from executives and the board. But for credit unions looking to tap into the huge potential of the underserved opportunity and improve the financial lives of more consumers, it’s likely worth the effort.

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