Education, Partnerships Help Credit Unions Engage With the Unbanked

While being underbanked or unbanked is less of an issue today than it was in previous years, the United States still has its fair share of people who fall into these categories. According to the FDIC, as many as one in four Americans lack sufficient access to services typically offered by credit unions and retail banks, and 7% of Americans do not even have their own bank accounts.

People in these categories may have good reasons for bypassing traditional financial services, but doing so is more expensive over the long-term. Data from the Wharton School of Business showed that fees from cashing checks alone cost an average of $108 per year, or as much as $40,000 over the course of an individual’s life.

Credit unions can lend a helping hand. Their flexibility in serving lower income members is critical to engaging people who would otherwise miss out on mainstream financial services.

Understanding the Root of the Problem

To craft a solution, it’s critical to understand what causes individuals to avoid traditional financial institutions. Often, they can’t maintain minimum balances, pay for account charges, or even afford transportation to a credit union or bank branch during business hours. Sometimes low credit keeps them from opening a checking account in the first place.

These roadblocks force them to turn to check-cashing, prepaid debit cards, payday loans and other unconventional alternatives. Although these products might seem pragmatic on the surface, they put consumers at a serious disadvantage. People who rely on check cashing services have no safe way to save or store money. If someone steals their cash, they can’t get it back. Prepaid debit cards provide some security, but they come with high fees.

A lack of funds usually drives these bad choices, but poor financial education is a major factor as well. Low income consumers tend to lack financial literacy. Although abundant resources can be found online, many underserved people reside in rural areas where internet access is more limited.

Addressing Loss of Faith in Financial Institutions

Basic mistrust in the banking system also contributes to the problem. Betterment’s 2018 Consumer Financial Perspectives Report noted that 83% of all Americans believe that banks are no more ethical than they were before the 2008 crash, and 22% believe that banks are even less ethical now.

For credit unions to have an impact, they need to show how they are different from traditional banks and less likely to take advantage of vulnerable consumers. They need to explain that credit unions exist for the benefit of their members rather than investors – that they won’t squeeze profits at the expense of people who access their services.

There’s also a common misconception that avoiding financial institutions makes it difficult for creditors to find delinquent consumers. Credit unions can remind people that bypassing a bank doesn’t stop collection calls or prevent creditors from getting their money. Collection agents who cannot attach an account will instead simply garnish wages – an even more difficult challenge for financially strapped consumers.

The Role of the Credit Union

Although credit unions are certainly not obligated to lend to people with poor credit, they can still play an active role in helping these consumers get on the path to better financial health. Providing access to financial education is a great first step. According to a 2019 Kiplinger report, only 57% of Americans were considered to be “financially literate,” a large gap that credit unions can help fill with educational resources. While the approach might vary, every literacy initiative should at a minimum address credit scores, investment vehicles, debt management and the basics of retirement planning. To reach the broadest audience, it’s also important to make sure that content is available both online and in person where possible.

Another creative way to connect to the underserved is to offer “second chance” checking accounts. These products can serve as the first stepping stone to engagement with the mainstream financial system. The accounts don’t need to have the perks and features of a standard checking account, but they can provide enough functionality to get skeptical or otherwise unfinanceable consumers to start their banking journey.

Finally, credit unions should consider partnering with businesses that offer critical supplementary services to these consumers, such as tools that assist with credit improvement, credit monitoring and identity protection. These services can help advance and sustain consumer health, opening the door to new products that were previously unattainable.

By acting in the interests of members, offering quality financial education, and partnering with new and innovative financial service providers, credit unions can begin to make a world of difference for underserved consumers in their communities.

Nirit Rubenstein is CEO and Co-Founder of Dovly, a Phoenix, Ariz.-based fintech providing automated credit repair software.