Some banks are using mobile technology to answer a big challenge from regulators: how to offer consumers outside the mainstream more products and services.
One bank in a poverty stricken section of the Mississippi Delta, surrounded by check cashers on nearly every corner, is figuring out how to serve the underbanked with a combination of state-of-the-art technology and personal service, yet it complains that regulatory constraints and reams of disclosures get in the way. Others, like BBVA Compass, are just starting to design mobile apps for the underprivileged.
About 8% of U.S. households are unbanked and another 20% are underbanked, according to the Federal Deposit Insurance Corp., which will publish a report this fall about expanding access to the banking system. Underbanked consumers, as the agency defines the category, have a bank account but also rely on alternative financial services outside of the banking system like check cashers and payday lenders.
"People who are doing this don't get the same consumer protections that you get in the banking system and don't always have the same opportunities to build assets and credit histories as you would in a banking relationship," said Susan Burhouse, senior consumer researcher for the FDIC's division of depositor and consumer protection, who spoke at the American Banker's Financial Services Marketing & Innovation Symposium last week. "In addition, having people outside of the system can undermine confidence in the banking system itself."
The FDIC sees mobile banking as a primary way to serve the less-banked, but believes the current crop of mobile banking apps are not always "economic-inclusion friendly," as Burhouse puts it.
The FDIC's forthcoming research finds that about 33% of unbanked households and 65% percent of underbanked households have smartphones.
Underbanked consumers are adopting mobile banking at high rates. About 42% of underbanked households have used mobile financial services in the past year compared with just over a third of fully banked households. One in three underbanked households say their mobile phone is primary way they interact with their bank (versus 22% of fully banked mobile banking users).
Burhouse acknowledges that mobile banking will not solve every problem of the underbanked.
"There are people who are unbanked because they feel they don't have enough money, or they don't have the identifications to open accounts," she said. "Those challenges will persist whether you're using mobile or any other channel. But we see how fast smartphone ownership is rising among the underbanked and we think there's room for mobile financial services to play a role."
Mobile account opening, for instance letting the customer set up an account directly from a mobile device rather than a desktop computer could be a game changer in improving access for underbanked consumers who in many cases don't have a computer at home, Burhouse suggests.
Another mobile banking feature that could be useful to the underbanked, she says, is personal financial management tools that provide consumers with personalized, timely advice to help them reach their financial goals.
Mobile banking needs to be combined with other financial services channels and legacy payment systems as well as some form of human interaction, said Matt Homer, who until recently was a policy analyst in the same FDIC division Burhouse works for. For instance, underbanked people might need a traditional payment mechanism to pay a landlord who insists on getting cash, money order or check.
Mobile banking for the underserved also needs to provide convenience and speed, Homer said. "If I deposit a check today and also need to pay someone today, will I have access to those funds?" he said. "If it takes two days, that's a problem for me if I don't have a large enough financial buffer."
Real-time or near-real-time alerts are also important to this segment of the population, he said.
"We know there are alerts but they're not always in real time," he pointed out. "If I receive an alert today that says that I dropped below my balance threshold yesterday, that may not be real helpful to me." Users ought to be able to create alerts directly from a mobile device, without requiring access to a computer, he noted.
Several banks are testing different apps, financial planning services and speedy payment methods to respond to the recommendations of policymakers.
In Arkadelphia, Ark., the $1.1 billion-asset community development bank Southern Bancorp was founded in the 1980s to serve distressed rural markets.
In one of its communities, Clarkston, Miss., within a one-mile radius there are 13 alternative financial services providers: check cashers and other alternative financial services providers with costly products. The town has a population of 8,000.
"In our communities, especially low-income, un- and underbanked communities, where there's not a lot of traditional banks, those providers fill a void," Dominik Mjartan, senior vice president of the bank, said in a recent interview. "The product that strips more wealth and assets from the most vulnerable people in America is predatory lending or payday lending."
In a typical scenario, a customer might borrow $250 from a payday lender for a car repair, pay a significant fee, fail to meet the two-week repayment window and roll the loan over several times. "That traps people in a perpetual cycle of debt," Mjartan said.
Yet it's still hard for traditional banks to compete with their speed and seeming convenience.
"The banks are not equipped as well to deal with that," Mjartan said, because of a combination of regulatory constraints and disclosure requirements.
Southern Bancorp makes a lot of small, unsecured consumer loans. The typical term is 12 months and the interest rates are in the single digits, Mjartan says.
But the tremendous amount of paperwork and disclosures the bank is forced to load its borrowers with is often overwhelming.
To better compete, the bank built a new core-processing system and responsive design environment that automatically adjusts to devices of all sizes, with help from a company it helped create, Smiley Technologies.
The platform "gives us lots more control over the types of products and services we provide, so we can provide faster processes and deal with changes in the regulatory landscape faster than a lot of the regulated institutions that have large legacy core-system providers," Mjartan said. The software took ten years to build and provides one view to all applications and data.
Most transactions are processed in real time or close to real time, such that ATM deposits, card purchases and mobile money transfers are reflected in the customer's balance immediately. This is critical for customers who do not have the luxury of waiting three days for their check to clear, Mjartan said.
The bank has built in other underbanked-friendly options. Customers can, for example, turn their debit card on and off from their mobile device. They can manage text alerts from their device. To help customers quickly see where they stand financially, say while on line at a grocery store, the bank and Smiley Technologies developed a feature called "Shake and Bank" that lets the user shake the phone to see his balances.
"Of course someone from Arkansas would come up with that," Mjartan joked.
The bank tries to meet the FDIC's call for speed and simplicity in its mobile interface.
"A lot of our customers work two or three jobs, but the money just doesn't add up, they always run out so speed and access to their resources is critical," Mjartan said. "They don't have the $500 buffer in their checking account to wait for their check to clear so they can access it."
BBVA's BUDGET TOOL
At BBVA Compass in Birmingham, Ala., Jeff Dennes, who is senior executive vice president of business development and digital transformation, is creating a mobile app for the underbanked that will launch next year. One feature he plans to include is budgeting help.
"We all know we should have a budget, yet most of us don't have a budget," Dennes said. But the bank actually knows its customers' budgets because it can see where they spend their money every month, and can share that information with users. Just letting customers see how much they're spending on gas, for example, can be an eye-opener.
Dennes plans to use some of the well-regarded mobile banking technology BBVA Compass and Simple (the neobank BBVA acquired in February).
"I don't think we have to start from scratch," he said. "We can marry some of the existing capabilities with marketing opportunities."