Who are the "underbanked"? Simply put, they are people who do not qualify for mainstream financial products and services...
To start, what does being underbanked mean? The underbanked can be defined as the people who are not adequately served by the mainstream financial services offered by traditional banks.
So, what’s the issue? The makeup of this group has changed dramatically leaving an even larger component of today’s society without proper access to retail banking services.
Historically the group of people that compromised the underbanked were those with lower income, poor credit, either unemployed, uneducated, or immigrants. The financial crisis that occurred over the last several years is clearing up, but has now left a new set of individuals who no longer have access to traditional retail banking services.
This new group is comprised of Millennials, who are seemingly educated, employed and well-connected. Good or bad, the unbanked or underbanked consumers are a large component of today's society. As a result, understanding who this group actually is and what is being done to change the financial landscape for these consumers is crucial.
According to the 2013 FDIC National Survey of Unbanked or Underbanked Households, 20% of U.S. households, or 24.8 million Americans were underbanked, which means they had access to some retail banking products, but still sought after and used alternative funding services. This is an incredible number of people using outside or non-traditional financial services.
A key reason for being unable to access financial options from traditional banks was because the consumer experienced a major life event in the past year that stressed their finances. However, the survey above indicates that this is no longer the case and very few people have had such a triggering event.
Here's a closer look at today’s underbanked consumers.
There are a variety of reasons for the shift in underbanked consumers. First, the financial crisis had a tremendous and long-lasting impact on young people. Even if they may have jobs now, many did not initially.
To make matters worse, many of the college graduates have high-cost student loans and jobs with salaries that don’t match this added cost of living. Traditional banks tend to focus their lending efforts on consumers with strong employment, solid credit scores, and some form of liquid assets. As a result, because most of today's Millennials can't meet those standards, banks overlook their needs.
Additionally, Millennials are simply less trusting of big banks following the financial crisis. It doesn’t help that banks have also been slow to adapt to new technologies, resulting in cumbersome and time-intensive loan application processes and other banking activities.
This negative perception of banks has led Millennials to search for innovative, tech-savvy, mobile and consumer-friendly funding sources. What they have found are new alternative online lenders that provide the technology and user-friendly mobile processes that they were seeking and are accustomed to in other parts of their lives.
The 2014 "Treading Water in the Deep End" report estimates that 44% of U.S. households live paycheck-to-paycheck. These individuals have less than 3 months worth of savings, and have a hard time making ends meet, let alone plan for something unexpected.
According to the Center for Financial Services Innovation, the four main reasons why consumers seek alternative lenders are unexpected expenses, misaligned cash flow, expenses exceeding income, and large planned purchases.
The limited credit options available to the underbanked has often led them to high-cost predatory loans such as payday, installment and title loans, leaving even well-intentioned, hard-working consumers victim to the wrong loan.
Because these high-cost lenders have fewer qualification requirements, they are easy to get. However, they push consumers into a deeper hole with debt that is harder to repay.
Luckily, new technology has brought more options to consumers. There is a new group of consumer-friendly and responsible online alternative lenders gaining market share by leveraging the use of social media, big data analytics, and complex underwriting models.
These lenders are offering:
These new companies provide great alternatives to high-cost, predatory payday and title loans.
For additional information on these loans, as well as a list of lenders, check out the Borrowize loan search feature. We work with a diverse network of responsible and transparent lenders, and our site matches you with the right product to fit your needs.
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