The Center for Financial Services Innovation (CFSI) recently presented its 2017 Financially Underserved Market Size Study. This study looked at how financially underserved people could benefit from new products aimed at assisting their situation, while also analyzing ways that the financial marketplace could advance to include additional products aimed at this population.
CFSI defined the underserved market as people who “face barriers to using mainstream financial products”. This typically means that these consumers have low to moderate incomes; statistics show that approximately 67 million adults in the United States qualify as an underserved consumer. Additionally, CFSI describes income volatility as another deciding factor when defining the underserved population, with 54 million American adults falling into this category. This population also includes consumers who may have issues with their credit — either with a credit score below 600 or have a credit score that cannot be calculated due to a lack of information; 91 million U.S. adults fall into this category. Finally, underserved consumers also include those who do not have a bank or cannot utilize a bank’s services to the fullest extent; there are approximately 67 million U.S. adults in this category.
Overall, approximately 138 million adults are considered “financially unhealthy”; this CFSI report only looks at the individual consumers who are underserved, as they have the biggest need for safe and secure financial products.
- Revenue from the overall market grew 6.6% from 2015 to 2016, or $10.7 billion. Additional growth is expected to be seen in 2017 by another 8.3%.
- $173 billion were paid in fees and interest as the market accessed $1.94 trillion in financial services.
- Nonbank small business loans grew at 86.8%; title loans grew at 31%; and credit cards of all types grew at 20.2% to 28.5%.
- In-person domestic money transfers declined by 27%, while buy-here-pay-here auto loans declined by 14.5%.
- The largest financial product area was retail credit cards ($33.2 billion in 2016). The second largest was subprime auto loans ($27.8 billion) and overdraft ($24.5 billion).
The underserved consumer relies on credit cards to meet a variety of needs, not just for emergencies. They utilize retail, subprime, and secured cards to take care of short-term needs. This also provides them with an opportunity to build credit. In 2016, $33.2 billion was put onto retail cards, which often offer lower thresholds of approval requirements. In 2016, retail card spending increased by 28.5%, compared to an increase in use of subprime credit cards to 23.1%.
Underserved consumers spent $39.4 billion on fees associated with single payment credit loan products, which includes payday loans, pawn shop loans, and any other loan due in one lump sum. This is a reduction of 3% from the previous year. However, these types of loans are expected to decline only slightly in 2017, since pawn shop loans are projected to be more steady.
Short-term credit loans include loans that are paid on an installment basis within two years. $57.9 billion was spent on fees and interest by the underserved population in 2016. Projections for 2017 include an increase in nonbank small business loans, auto title loans, retail, subprime, and secured credit cards.
Long-term credit loans are paid in installments for over two years. $51.7 billion in fees and interest was spent on these loans by underserved consumers in 2016. This is projected to grow even further with an 11.7% rate of increase in 2017.
As we hear about every day, many business owners are also underserved — especially on the lending side — as high fees, lengthy paperwork, slow approvals and interminable underwriting. It is why we offer small business loans and merchant cash advance solutions to clients who need working capital for daily operations, to buy or upgrade equipment, hire more employees, consolidate debt and even pay the rent.
Overdraft fees drove the market. In 2016, underserved consumers paid $24.5 billion in overdraft fees. Consider this: a mere 8.3% of all checking accounts experience more than 10 overdrafts in a year — yet this number is responsible for generating 75% of overdraft annual revenue. Those who had to overdraft more than ten times a year averaged -$521 per underserved consumer. Researchers concluded this demonstrates a temporary shortfall and financial institutions can do more to positively assist these consumers to continue banking.
CFSI Overall Thoughts
Underserved consumers need banking solutions that will fit their month-to-month income levels. By offering flexible programs and solutions to this population, the underserved community can have an opportunity to build their credit and strengthen their financial health.