Banks look to lower-income consumers as potential market

Kevin Rademacher

Friday, Nov. 19, 2004 | 10:58 a.m.

There's good reason for banks to cater to customers that were once, at best, ignored or even cast aside.

Speaking to a banking convention in Las Vegas this week, Jennifer Tescher, director of the Center for Financial Services Innovation, said 30 million to 40 million Americans have no formal banking relationship. That, she added, amounts to a possible $9 billion market.

"Lower-income consumers are now seen as one of the more promising markets," Tescher said.

That unbanked market includes minority groups, those with low incomes and former bank customers unable to establish accounts because of past credit problems such as bounced checks.

The diverse makeup of the emerging market will, however, make that population harder to reach.

"The market really has several sub-segments," Tescher said. "It's a series of niche markets, not a mass market."

Also speaking at the convention was Edna Sawady, chief operating officer for community development with KeyCorp, and Wayne Malone, director of deposit products and distribution with Citigroup.

Both have made aggressive attempts to reach that market, but they concede that the time it takes to develop the personal relationships means that profitability takes time.

"It's not a quick thing," Sawady said. "We have figured that we can break even in three to four years and be profitable in four to five years."

In that process is moving from a simple checking account to automobile purchases to mortgages, insurance and investments.

"Eventually they build up to higher revenue services," Sawady said.

Malone added that the unbanked have money. They just do not manage it in a fashion that fits with typical banking products. He pointed out that many of these consumers are currently paying more than $30 a transaction to use a check cashing service, instead of $3 a month for a low-balance checking account.

"Right now they are spending more money than they should on banking," he said. "So, there's money there ... It's not only the right thing to do, but we think we can make money there."

Kirk Clausen, president of Wells Fargo Bank's Nevada operations, agreed with most of what the panelists said -- except the length of time to profitability. He agreed that there is money in this population, and that much of it is being spent on over-priced goods and services, such as check cashing and unscrupulous car dealers.

Clausen said products such as automobile loans meet needs that these consumers have immediately and can be met if a relationship can be forged.

"I don't agree that we can't make money early on in the relationship," he said. "They have needs, and we have an interest in serving those needs."

Clausen and the panelists agreed that relationships are the key to reaching that community. Advertising in mass market outlets like network television or mainstream newspapers are probably not going to create inroads. Instead, many of the critical contacts come from community involvement and word-of-mouth.

Wells Fargo has established the Diversified Growth Segment Group which operates companywide to identify nuances in reaching the underserved communities.

The results have ranged from no-fee accounts to branches with a Hispanic or African-American theme.

"These are not loss-leader products for us," Clausen said, adding that making such moves has not been easy. "As hard as it is for those folks to reach us at times ... it's just as hard for us to figure out how to reach them."

Malone agreed.

"The word patience is a good one," he said. "You've got to be in it for the long run."

Said Sawady: "As an industry we've excluded them, so we need to win them back."