Banking Products and Services for Underbanked Markets

Low- to moderate-income communities and minority groups are disproportionately represented in underbanked markets. Surveys suggest many reasons underbanked individuals are unable or unwilling to open bank accounts. One key reason is the perception that banks charge high fees for accounts, so the accounts are costly to maintain. To counter this perception, banks and regulators are looking into designing low-cost bank products and services for the underbanked market. These products and services include:

Low-cost bank transactional and savings accounts - The FDIC launched Model Safe Accounts, a one-year pilot program that began on January 1, 2011, to evaluate the feasibility of banks offering safe, low-cost bank transactional and savings accounts for underserved consumers. Nine banks participated. A summary of the pilot and a list of the participating banks, as well as the template, lessons learned, challenges faced, and other information about this pilot, are available on the FDIC’s Web site.

Low-cost, small-dollar loans - Consumer groups and banking regulators encourage banks to offer small-dollar loans at low cost for consumers who require emergency credit and are unable to obtain credit from traditional sources such as banks and credit unions. In February 2008, the FDIC began the Small-Dollar Loan Pilot Program, a two-year pilot project, to review affordable and responsible small-dollar loan programs in financial institutions. In all, 28 banks volunteered to participate in this pilot. The program’s website offers lessons learned from the pilot and a template for banks.

Additional information on low-cost, small-dollar loans is available in the congressional testimony by Barry Wides, the OCC’s Deputy Comptroller for Community Affairs, to the U.S. House Committee on Financial Services’ Subcommittee on Financial Institutions and Consumer Credit.

Prepaid access programs - Consumers can obtain money electronically through a variety of cards and other programs. These include general-purpose reloadable cards, payroll cards, government benefit cards, retail gift cards, mobile phones, and Web sites. The programs allow consumers to add, spend, and withdraw money as needed. OCC Bulletin 2011-27, “Risk Management Guidance and Sound Practices on Prepaid Access Programs,” provides banks with guidance on assessing and managing the risks associated with prepaid access programs.

• Payroll cards - “Payroll Cards: An Innovative Product for Reaching the Unbanked and Underbanked,” a Community Developments Insights report by the OCC’s Community Affairs Department, examines the growing use of payroll cards. This report also discusses how banks can use payroll cards to bring unbanked households into the financial mainstream.

Low-cost remittance services - Recent immigrants make up a large segment of the underbanked population. Many immigrants come from rural areas in their native countries where banks may not have been commonly available. As a result, they may be unfamiliar and have little or no experience with banks. While they may not have bank accounts, these immigrants regularly transfer a share of their incomes to family members in their home countries. Banks looking to serve immigrants will want to consider inexpensive remittance services. The OCC Community Developments Insights report “Remittances: A Gateway to Banking for Unbanked Immigrants” examines the banking needs of recent immigrants as well as the key risks, regulatory issues, and cultural barriers that banks face when serving this market.

One program, Directo a Mexico, offers an example of how banks are reaching out to recent immigrants. Directo a Mexico is an automated clearinghouse payment channel and the product of collaboration between the U.S. Federal Reserve and Banco de Mexico. The service links the payment systems of the two countries to produce an efficient interbank mechanism to process payments. More information tailored specifically for U.S. financial institutions is available on Directo a Mexico’s Web page. The information is available in English and Spanish.

Consumer identification requirements for new accounts - The 2001 USA Patriot Act outlines procedures in section 326, the Customer Identification Program (CIP), to help banks verify the identity of customers opening savings and checking accounts. The CIP program is explained in the spring 2009 issue of the OCC Community Developments Investments, “Cultivating Community-Based Financial Literacy Initiatives.” This newsletter describes several banking initiatives designed to encourage immigrants to use traditional banking services. These initiatives include financial literacy programs, specialized bank products, and alternative verification methods for customers opening new accounts. One of the newsletter articles, “Customer Identification for New Accounts,” explains in detail the USA Patriot Act’s CIP rule.

Financial literacy programs - Because financial literacy often is not taught in schools and homes, adults may be ill prepared to make wise financial decisions. The consequences of poor financial literacy can be compounded in underbanked communities, where residents rely on costly check-cashing, payday-loan, and other nontraditional financial services. Banks can play a constructive role in improving financial literacy in their communities by offering free financial education programs and resources. Banks can encourage their employees to volunteer as financial advisers and mentors in schools, community organizations, and churches, and in so doing, they might expand their customer base, create goodwill, and increase business opportunities.

In addition, banks supporting financial literacy initiatives may receive consideration for qualified community development activities during CRA reviews. The OCC offers information on how banks may receive CRA credit in the Community Developments Investments spring 2009 issue, “Cultivating Community-Based Financial Literacy Initiatives.”

To help banks in their efforts to promote financial literacy, the OCC offers many online resources, including regular Financial Literacy Updates, which list upcoming programs devoted to educating consumers about personal finance. The OCC’s Financial Literacy Resources Directory, has information on a variety of related topics.